Clarus Corp (CLAR) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s consolidated results of operations, financial condition and liquidity. This discussion should be read in conjunction with our financial statements and the accompanying notes to the financial statements.
Forward-Looking Statements
Please note that in this Annual Report on Form 10-K Clarus Corporation (which may be referred to herein as the “Company,” “Clarus,” “we,” “our” or “us”) may use words such as “appears,” “anticipates,” “believes,” “plans,” “expects,” “intends,” “future,” and similar expressions which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting the Company and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
Potential risks and uncertainties that could cause the actual results of operations or financial condition of the Company to differ materially from those expressed or implied by forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, the overall level of consumer demand on our products; general economic conditions and other factors affecting consumer confidence, preferences, and behavior; the potential impact of the uncertain macroeconomic environment on our financial results, including, but not limited to, the effects of sustained global inflationary pressures and interest rates, potential economic slowdowns or recessions, trade restrictions and regulatory changes, and global supply chain disruptions; the effect of inflation on our business, including any future pricing actions taken in an effort to mitigate the effects of inflation and potential impacts on our revenue, operating margins and net income; disruption and volatility in the global currency, capital and credit markets; the financial strength of retail economies and the Company’s customers; the Company’s ability to implement its business strategy; the ability of the Company to execute and integrate acquisitions; the Company’s exposure to product liability or product warranty claims and other loss contingencies, including, without limitation, recalls and liability claims relating to certain avalanche beacon transceivers distributed by BDEL; disruptions and other impacts to the Company’s business, as a result of an outbreak of disease or similar public health threat, and government actions and restrictive measures implemented in response; stability of the Company’s manufacturing facilities and suppliers, as well as consumer demand for our products, in light of disease epidemics and health-related concerns; the impact that global climate change trends may have on the Company and its suppliers and customers, increased focus on sustainability issues as a result of global climate change; regulatory or market responses to global climate change; the Company’s ability to protect patents, trademarks and other intellectual property rights; any breaches of, or interruptions in, our information systems; the ability of our information technology systems or information security systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes; our ability to properly maintain, protect, repair or upgrade our information technology systems or information security systems, or problems with our transitioning to upgraded or replacement systems; the impact of adverse publicity about the Company and/or its brands and products, including without limitation, through social media or in connection with brand damaging events and/or public perception; the potential impact of the Consumer Products Safety Commission’s and the U.S. Department of Justice’s investigations related to BDEL’s reporting obligations under the Consumer Product Safety Act in connection with BDEL’s recall of certain models of its avalanche transceivers on our business, results of operations, and financial condition; fluctuations in the price, availability and quality of raw materials and contracted products as well as foreign currency fluctuations; ongoing disruptions and delays in the shipping and transportation of our products due to port congestion, container ship availability and/or other logistical challenges; the impact of political unrest, natural disasters or other crises, terrorist acts, acts of war and/or military operations; our ability to utilize our net operating loss carryforwards; changes in tax laws and liabilities, tariffs, legal, regulatory, political and economic risks; the Company’s ability to maintain a quarterly dividend; our ability to obtain additional capital and funding on acceptable terms to meet our financial obligations as well as to support our business operations and growth strategy; and any material differences in the actual financial results of the Company’s past and future acquisitions, including the impact of acquisitions and any recognition of impairment or other charges relating to any such acquisitions on the Company’s future earnings per share. More information on potential factors that could affect the Company’s financial results can be found under Item 1A. Risk Factors of this Annual Report on Form 10-K. All forward-looking statements included in this Annual Report on Form 10-K are based upon information available to the Company as of the date of this Annual Report on Form 10-K, and speak only as the date hereof. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K.
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Overview
Headquartered in Salt Lake City, Utah, Clarus is a global leading designer, developer, manufacturer and distributor of best-in-class outdoor equipment and lifestyle products focused on the outdoor enthusiast markets. Each of our brands has a long history of continuous product innovation for core and everyday users alike. The Company’s products are principally sold globally under the Black Diamond®, Rhino-Rack®, MAXTRAX®, and TRED Outdoors® brand names through outdoor specialty and online retailers, our own websites, distributors and original equipment manufacturers. Our portfolio of iconic brands is well-positioned for sustainable, long-term growth underpinned by powerful industry trends across the outdoor and adventure sport end markets.
Our iconic brands are rooted in performance-defining technologies that enable our customers to have their best days outdoors. We have a long history of technical innovation and product development, backed by an extensive patent portfolio that continues to evolve and advance our markets. We focus on enhancing our customers’ performance in the most critical moments. Our commitment to quality, rigorous safety, and ultimately best-in-class design is evidenced by outstanding industry recognition, as we have received numerous product awards across our portfolio of brands.
Each of our brands represents a unique customer value proposition. Supported by six decades of proven innovation, Black Diamond is an established global leader in high-performance, activity-based climbing, skiing, and technical mountain sports equipment. The brand is synonymous with premium performance, safety and reliability. Founded in 1992, our Rhino-Rack brand is a globally-recognized designer and distributor of highly-engineered automotive roof racks and accessories to enhance the outdoor enthusiast’s overlanding experience. Founded in 2005, our MAXTRAX brand offers high-quality overlanding and off-road vehicle recovery and extraction tracks for the overland and off-road market. Similarly, TRED, founded in 2012, is a trusted brand for key retailers and distributors in the overlanding and off-road vehicle recovery market.
Clarus, incorporated in Delaware in 1991, acquired Black Diamond Equipment, Ltd. (“Black Diamond Equipment”) in May 2010 and changed its name to Black Diamond, Inc. in January 2011. In October 2012, we acquired PIEPS Holding GmbH and its subsidiaries (collectively, “PIEPS”). On August 14, 2017, the Company changed its name from Black Diamond, Inc. to Clarus Corporation and its stock ticker symbol from “BDE” to “CLAR” on the NASDAQ stock exchange.
On August 21, 2017, the Company acquired Sierra Bullets, L.L.C. (“Sierra”). On October 2, 2020, the Company completed the acquisition of certain assets and liabilities constituting the Barnes business (“Barnes”). On July 1, 2021, the Company completed the acquisition of Australia-based Rhino-Rack Holdings Pty Ltd (“Rhino-Rack”). On December 1, 2021, the Company completed the acquisition of Australia-based MaxTrax Australia Pty Ltd (“MAXTRAX”). On October 9, 2023, the Company completed the acquisition of Australia-based TRED Outdoors Pty Ltd. (“TRED”). On December 5, 2024, the Company completed the acquisition of certain assets and liabilities constituting the RockyMounts business (“RockyMounts”).
On February 29, 2024, the Company and Everest/Sapphire Acquisition, LLC, its wholly-owned subsidiary, completed the sale to Bullseye Acquisitions, LLC, an affiliate of JDH Capital Company, of all of the equity associated with the Company’s Precision Sport segment, which is comprised of the Company’s subsidiaries Sierra and Barnes Bullets – Mona, LLC (“Barnes”), pursuant to a Purchase and Sale Agreement dated as of December 29, 2023, by and among, Bullseye Acquisitions, LLC, Everest/Sapphire Acquisition, LLC and the Company (the “Precision Sport Purchase Agreement”). Under the terms of the Precision Sport Purchase Agreement, the Company received net proceeds of approximately $37,871,000 in cash, after payment of certain fees and settlement of the Restated Credit Agreement, for all of the equity associated with the Company’s Precision Sport segment. The activities of the Precision Sport segment have been segregated and reported as discontinued operations for all periods presented. See Note 3 to our consolidated financial statements for financial information regarding discontinued operations.
On August 6, 2018, the Company announced that its Board of Directors approved the initiation of a quarterly cash dividend program of $0.025 per share of the Company’s common stock (the “Quarterly Cash Dividend”) or $0.10 per share on an annualized basis. The declaration and payment of future Quarterly Cash Dividends is subject to the discretion of and approval of the Company’s Board of Directors. In 2024, 2023 and 2022 our total Quarterly Cash Dividends were $3,831,000, $3,750,000, and $3,721,000, respectively. On March 5, 2025, the Company announced that its Board of Directors approved the payment on March 26, 2025 of the Quarterly Cash Dividend of $0.025 to the record holders of shares of the Company’s common stock as of the close of business on March 17, 2025.
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Restructuring
Starting in 2023, the Company began incurring expenses to facilitate long-term sustainable growth through cost reduction actions, consisting of employee reductions, facility rationalization and contract termination costs. During the years ended December 31, 2024 and 2023, the Company incurred $1,948,000 and $3,223,000, respectively, of restructuring charges related to these actions. The Company has incurred $5,171,000 of cumulative restructuring charges since the commencement of our restructuring actions in 2023. The Company accrues for restructuring costs when they are probable and reasonably estimable. These costs include severance costs, exit costs, and other restructuring costs and are included in Restructuring charges in the consolidated statements of comprehensive loss. Severance costs primarily consist of severance benefits through payroll continuation, conditional separation costs and employer tax liabilities, while exit costs primarily consist of lease exit and contract termination costs. Other costs consist primarily of costs related to the discontinuance of certain product lines and are distinguishable and directly attributable to the Company’s restructuring initiative and not a result of external market factors associated with the ongoing business. We estimate that we will incur restructuring costs related to employee-related costs and facility exit costs during the year 2025; however, the Company cannot estimate the total amount expected to be incurred as cost reduction actions continue to be evaluated. The Company anticipates completing these restructuring activities in 2025.
Critical Accounting Policies and Use of Estimates
Management’s discussion of our financial condition and results of operations is based on the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates and assumptions including those related to revenue recognition, income taxes and valuation of long-lived assets, goodwill and indefinite-lived intangible assets, and other intangible assets. We base our estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.
We believe the following critical accounting policies include the more significant estimates and assumptions used in the preparation of our consolidated financial statements. Our accounting policies are more fully described in Note 1 of our consolidated financial statements.
| Column 1 | Column 2 |
|---|---|
| ● | Fair value of net assets acquired in business combinations – We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. We engage independent third-party valuation specialists to assist us in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Different valuation approaches are used to value different types of intangible assets. The income approach is a valuation technique that capitalizes anticipated income associated with the asset being valued. This approach is predicated on developing net income and cash flow projections which are discounted for risk and the time value of money. This approach is generally the principal approach to the valuation of most intangible assets. The market approach involves the compilation and analysis of recent acquisitions of similar assets in the open market. A fair value can be estimated after adjustments are made to reflect comparability differences between the assets sold and those being valued. This method of valuation applies primarily to the valuation of owned land, inventory, and certain intangible assets. The cost approach estimates the amount that would be required to replace the service capacity of an asset (often referred to as current replacement cost). We typically apply all three approaches to estimate the fair value of our tangible and intangible tangible assets depending on the type of asset acquired. Business acquisitions may include contingent consideration payments based on various future financial measures, such as sales-based milestones, related to the acquired entity. We estimate the fair value of contingent consideration liabilities based on estimated sales growth rates, discount rates, and other relevant factors. |
Significant estimates in valuing certain intangible assets include, but are not limited to, the projected financial information related to each individual asset, particularly forecasted sales growth rates, cash flows, market-based royalty rates and estimated discount rates. Product technology and trademarks are valued using the relief-from-royalty method, and customer relationships are valued using the multi-period excess earnings model. The relief-from-royalty method is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. The multi-period excess earnings method supposes that the owner of the intangible asset is able to achieve a return in excess
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of that received without the intangible asset through enhanced revenues or cost savings. Our discounted cash flow estimates use discount rates that correspond to a weighted-average cost of capital consistent with a market-participant view. The discount rates are consistent with those used for investment decisions and take into account our operating plans and strategies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion or all of our intangible assets, which would adversely affect our operating results in the period of impairment.
| Column 1 | Column 2 |
|---|---|
| ● | Income taxes – We account for income taxes using the asset and liability method. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. We may make assumptions, judgments and estimates in order to determine the future taxable income available to support the recoverability of deferred tax assets at a more-likely-than-not threshold. The sources of future taxable income include 1) future reversal of existing taxable temporary differences, 2) taxable income in carryback years if carryback is permitted, 3) future taxable income from future operations, and 4) tax planning strategies. The degree and subjectivity and judgment increases as the source of future taxable income becomes more inherently subjective. Our assumptions, judgments and estimates relative to the realizability of a deferred tax asset take into account predictions of the amount and category of expected future taxable income. Actual operating results and the underlying amount and category of income in future years could cause our current assumptions, judgments and estimates of recoverable net deferred taxes to be inaccurate. Changes in any of the assumptions, judgments and estimates mentioned above related to the realizability of deferred tax assets, could materially affect our financial position and results of operations. |
| Column 1 | Column 2 |
|---|---|
| ● | Goodwill and indefinite-lived intangible assets – We assess the recoverability of our reporting units’ carrying value of goodwill by performing a qualitative assessment and/or a quantitative goodwill impairment test. At a minimum, we perform an annual assessment of possible goodwill impairment as of December 31st of each year. Management may perform an interim goodwill impairment assessment whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of the reporting unit. If we begin with a qualitative assessment and are able to support the conclusion that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, we are not required to perform the quantitative goodwill impairment test. Otherwise, we are required to perform the quantitative goodwill impairment test which compares the reporting unit’s carrying value including goodwill to its estimated fair value. We estimate the reporting units’ fair value using a combination of the income approach based upon projected discounted cash flows of the reporting unit and the market approach based upon the market multiple of comparable publicly traded companies. If the estimated fair value of the reporting entity exceeds the carrying value, the goodwill is not impaired, and no further review is required. However, if the carrying value exceeds the estimated fair value of the reporting unit, an impairment expense should be recognized for the excess of the carrying value over the fair value. |
Under the income approach, the estimated discounted cash flows are based on the best information available to us at the time, including supportable assumptions and projections we believe are reasonable. Our discounted cash flow estimates use discount rates that correspond to a weighted-average cost of capital consistent with a market-participant view. The discount rates are consistent with those used for investment decisions and take into account our future operating plans and strategies. Certain other key assumptions utilized, including revenue and cash flow projections, are based on estimates consistent with those utilized in our annual budgeting and planning process that we believe are reasonable. However, if we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion or all of our goodwill, which would adversely affect our operating results in the period of impairment.
The market approach identifies the EBITDA multiples of comparable publicly traded companies. The reporting unit’s EBITDA projections are multiplied by the market multiple to estimate its current estimated fair value. Key assumptions utilized in estimating the reporting unit’s EBITDA include revenue and cash flow projections. If the market multiples or EBITDA value assumptions are incorrect, our goodwill impairment evaluation could also be adversely affected, and we may impair a portion or all of our goodwill, which would adversely affect our operating results in the period of impairment.
We also test indefinite-lived intangible assets for impairment annually during the fourth quarter, as of December 31st of each year. Management may perform an interim indefinite-lived intangible asset impairment assessment whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of the reporting unit. If the carrying value of the indefinite-lived asset is higher than its fair value, then
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the asset is deemed to be impaired and the impairment charge is estimated as the difference. The Company calculates the fair value of its indefinite-lived intangible assets using the income approach, specifically the relief-from-royalty method. The relief-from-royalty method is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. Internally forecasted revenues, which the Company believes reasonably approximate market participant assumptions, are multiplied by a royalty rate to arrive at the estimated net after tax cost savings. The royalty rate used in the analysis is based on an analysis of empirical, market-derived royalty rates for comparable intangible assets. The net after tax cost savings are discounted using the same weighted-average cost of capital discount rate developed for purposes of the Company’s quantitative goodwill impairment test. The key uncertainties in these calculations are the assumptions used in determining the revenue associated with each indefinite-lived intangible asset and the royalty rate. If we do not achieve the results reflected in the market assumptions and forecasted estimates, our indefinite-lived intangibles impairment evaluations could be adversely affected, and we may impair a portion or all of their carrying values, which would adversely affect our operating results in the period of impairment.
Recent Accounting Pronouncements
See “Recent Accounting Pronouncements” in Note 1 of our consolidated financial statements.
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Results of Operations (In Thousands)
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
The following presents a discussion of operations for the year ended December 31, 2024, compared with the year ended December 31, 2023:
| | | | | | |
|---|---|---|---|---|---|
| | Year Ended December 31, | ||||
| | December 31, 2024 | December 31, 2023 | |||
| | | | | | |
| Sales | | | | | |
| Domestic sales | $ | 105,745 | | $ | 112,385 |
| International sales | | 158,570 | | | 173,635 |
| Total sales | | 264,315 | | | 286,020 |
| | | | | | |
| Cost of goods sold | | 171,696 | | | 188,509 |
| Gross profit | | 92,619 | | | 97,511 |
| | | | | | |
| Operating expenses | | | | | |
| Selling, general and administrative | | 111,948 | | | 114,603 |
| Restructuring charges | | 1,948 | | | 3,223 |
| Transaction costs | | 576 | | | 593 |
| Contingent consideration benefit | | (125) | | | (1,565) |
| Legal costs and regulatory matter expenses | | 3,842 | | | 1,764 |
| Impairment of goodwill | | 36,264 | | | - |
| Impairment of indefinite-lived intangible assets | | 8,545 | | | - |
| | | | | | |
| Total operating expenses | | 162,998 | | | 118,618 |
| | | | | | |
| Operating loss | | (70,379) | | | (21,107) |
| | | | | | |
| Other income (expense) | | | | | |
| Interest income, net | | 1,467 | | | 67 |
| Other, net | | (1,673) | | | 961 |
| | | | | | |
| Total other (expense) income, net | | (206) | | | 1,028 |
| | | | | | |
| Loss before income tax | | (70,585) | | | (20,079) |
| Income tax expense (benefit) | | 17,852 | | | (4,291) |
| Loss from continuing operations | | (88,437) | | | (15,788) |
| | | | | | |
| Discontinued operations, net of tax | | 36,150 | | | 5,642 |
| | | | | | |
| Net loss | $ | (52,287) | | $ | (10,146) |
Sales
Total sales decreased $21,705, or 7.6%, to $264,315 during the year ended December 31, 2024, compared to total sales of $286,020 during the year ended December 31, 2023. The decrease in sales was attributable to a decrease in sales at the Outdoor and Adventure segments of $20,485 and $1,220, respectively.
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Sales in the Adventure segment were reduced by $524 due to foreign exchange impact, compared to the prior period. Sales in the Outdoor segment increased by $235 due to foreign exchange impact, compared to the prior period.
Sales in the Outdoor segment decreased due to weakness in our European, independent global distributor (“IGD”), and North American markets, combined with the effects from our product simplification and SKU rationalization strategy. Sales in the Adventure segment decreased due to lower demand from original equipment manufacturer (“OEM”) and wholesale customers both in Australia and North America, partially offset by a $3,019 increase from the TRED Outdoors acquisition.
Domestic sales decreased $6,640, or 5.9%, to $105,745 during the year ended December 31, 2024, compared to domestic sales of $112,385 during the year ended December 31, 2023. The decrease in sales was attributable to a decrease in sales at the Outdoor segment of $7,829, partially offset by an increase in sales at the Adventure segment of $1,189.
International sales decreased $15,065, or 8.7%, to $158,570 during the year ended December 31, 2024, compared to international sales of $173,635 during the year ended December 31, 2023. The decrease in sales was attributable to a decrease in sales at the Outdoor and Adventure segments of $12,656 and $2,409, respectively.
Cost of Goods Sold
Cost of goods sold decreased $16,813, or 8.9%, to $171,696 during the year ended December 31, 2024, compared to cost of goods sold of $188,509 during the year ended December 31, 2023.
Gross Profit
Gross profit decreased $4,892, or 5.0%, to $92,619 during the year ended December 31, 2024, compared to gross profit of $97,511 during the year ended December 31, 2023. Gross margin was 35.0% during the year ended December 31, 2024, compared to a gross margin of 34.1% during the year ended December 31, 2023. Gross margin during the year ended December 31, 2024, increased compared to the prior year due to favorable channel mix as a result of lower OEM sales at the Adventure segment and favorable product mix due to the simplification and SKU rationalization strategy at the Outdoor segment. These increases were partially offset by an increase in inventory reserve expenses at the Adventure segment.
Selling, General and Administrative
Selling, general, and administrative expenses decreased $2,655, or 2.3%, to $111,948 during the year ended December 31, 2024, compared to selling, general and administrative expenses of $114,603 during the year ended December 31, 2023. Selling, general and administrative expenses at the Outdoor segment decreased by $7,176 primarily as a result of lower retail expenses due to store closures and other expense reduction initiatives to manage costs. Selling, general and administrative expenses at the Adventure segment increased by $3,806 primarily as a result of investments in global marketing, e-commerce initiatives, and organizational leadership to accelerate growth, as well as the full year impact of the TRED Outdoors acquisition. These increases at the Adventure segment were partially offset by lower intangible amortization expense.
Restructuring Charges
Restructuring charges decreased to $1,948 during the year ended December 31, 2024, compared to restructuring charges of $3,223 during the year ended December 31, 2023. The restructuring charges incurred during the year ended December 31, 2024 relate to benefits provided to employees who were terminated due to the Company’s reduction-in-force as part of its continued realignment of resources within the organization of $1,824 and lease exit and contract termination costs of $124.
Transaction Costs
Transaction expense decreased to $576 during the year ended December 31, 2024, compared to transaction costs of $593 during the year ended December 31, 2023. The 2024 transaction costs primarily related to the RockyMounts and TRED Outdoor acquisitions and other expenses related to the Company’s various acquisition efforts.
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Contingent Consideration Benefit
Contingent consideration benefit decreased to $125 during the year ended December 31, 2024, compared to a contingent consideration benefit of $1,565 during the year ended December 31, 2023, which consisted of changes in the estimated fair value of contingent consideration liabilities associated with our acquisitions of MAXTRAX in 2021 and TRED in 2023.
Legal Costs and Regulatory Matter Expenses
Legal costs and regulatory matter expenses increased to $3,842 during the year ended December 31, 2024, compared to legal costs and regulatory matter expenses of $1,764 during the year ended December 31, 2023. The increase in legal costs and regulatory matter expenses recognized during year ended December 31, 2024 reflects the Company’s accrued liability for the outstanding regulatory matter with the U.S. Consumer Product Safety Commission (“CPSC”) and increased expenses related to the Company’s specific legal matters. See Note 16 to our consolidated financial statements for financial information regarding specific legal matters.
Impairment of Goodwill
Impairment of goodwill increased to $36,264 during the year ended December 31, 2024, compared to impairment of goodwill of $0 during the year ended December 31, 2023. Based on the results of the Company’s annual impairment analysis completed as of December 31, 2024, the Company determined that goodwill at the Adventure reporting unit was impaired and recognized a charge of $36,264.
Impairment of Indefinite-Lived Intangible Assets
Impairment of indefinite-lived intangible assets increased to $8,545 during the year ended December 31, 2024, compared to impairment of indefinite-lived intangible assets of $0 during the year ended December 31, 2023. Based on the results of the Company’s impairment analysis completed as of December 31, 2024, the Company determined that certain indefinite-lived intangible assets, specifically the Rhino-Rack and MAXTRAX trademarks, were impaired and recognized charges of $3,480 and $5,065, respectively, during the year ended December 31, 2024.
Interest Income, net
Interest income, net increased to $1,467 during the year ended December 31, 2024, compared to interest income, net of $67 during the year ended December 31, 2023. The increase in interest income recognized during the year ended December 31, 2024, was due to interest income on higher cash balances.
Other, net
Other, net changed by $2,634, or 274.1%, to ($1,673) during the year ended December 31, 2024, compared to other, net of $961 during the year ended December 31, 2023. The change in other, net was primarily attributable to an increase in remeasurement losses recognized on the Company’s foreign denominated accounts receivable and accounts payable. The change was partially offset by increases in gains in mark-to-market adjustments on non-hedged foreign currency contracts during the year ended December 31, 2024.
Income Taxes
Income tax expense (benefit) changed by $22,143, or 516.0%, to an income tax expense of $17,852 during the year ended December 31, 2024, compared to an income tax benefit of $4,291 during the same period in 2023. Our effective income tax rate was an expense of 25.3% for the year ended December 31, 2024, and differed compared to the statutory tax rates primarily due to the impact of recording a valuation allowance on deferred tax assets and the impairment of goodwill and indefinite-lived intangible assets, all of which are non-deductible for tax purposes. Our effective income tax rate was a benefit of 21.4% for the year ended December 31, 2023, and differed compared to the statutory tax rates due to the impact of officer compensation limitations, partially offset by the impact of tax credits, and permanent book to tax differences related to incentive stock options.
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Discontinued Operations
Net income from discontinued operations changed by $30,508, to $36,150 during the year ended December 31, 2024, compared to net income from discontinued operations of $5,642 during the year ended December 31, 2023. The change in net income from discontinued operations was primarily attributable to the pre-tax gain on the sale of the Precision Sport segment of $40,585.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The following presents the Company’s results of operations for the year ended December 31, 2023, compared with the year ended December 31, 2022:
| | | | | | |
|---|---|---|---|---|---|
| | Year Ended December 31, | ||||
| | 2023 | | 2022 | ||
| | | | | | |
| Sales | | | | | |
| Domestic sales | $ | 112,385 | | $ | 132,818 |
| International sales | | 173,635 | | | 182,433 |
| Total sales | | 286,020 | | | 315,251 |
| | | | | | |
| Cost of goods sold | | 188,509 | | | 205,298 |
| Gross profit | | 97,511 | | | 109,953 |
| | | | | | |
| Operating expenses | | | | | |
| Selling, general and administrative | | 114,603 | | | 120,814 |
| Restructuring charges | | 3,223 | | | - |
| Transaction costs | | 593 | | | 2,818 |
| Contingent consideration (benefit) expense | | (1,565) | | | 493 |
| Legal costs and regulatory matter expenses | | 1,764 | | | - |
| Impairment of goodwill | | - | | | 52,071 |
| Impairment of indefinite-lived intangible assets | | - | | | 40,240 |
| | | | | | |
| Total operating expenses | | 118,618 | | | 216,436 |
| | | | | | |
| Operating loss | | (21,107) | | | (106,483) |
| | | | | | |
| Other income (expense) | | | | | |
| Interest income, net | | 67 | | | - |
| Other, net | | 961 | | | (1,035) |
| | | | | | |
| Total other income (expense), net | | 1,028 | | | (1,035) |
| | | | | | |
| Loss before income tax | | (20,079) | | | (107,518) |
| Income tax benefit | | (4,291) | | | (14,716) |
| Loss from continuing operations | | (15,788) | | | (92,802) |
| | | | | | |
| Discontinued operations, net of tax | | 5,642 | | | 23,022 |
| | | | | | |
| Net loss | $ | (10,146) | | $ | (69,780) |
For a discussion of our results of operations for the year ended December 31, 2023, compared to the year ended December 31, 2022, please see Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 7, 2024.
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Liquidity and Capital Resources (In Thousands)
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
Our primary ongoing funding requirements are for working capital, expansion of our operations (both organically and through acquisitions) and general corporate needs, as well as investing in the various brands. We plan to fund these activities through a combination of our future operating cash flows and net proceeds from the sale of our Precision Sport segment. Upon the closing of the sale of the Precision Sport segment, the Company terminated and settled all outstanding borrowings on our revolving credit facility and term debt under the Restated Credit Agreement. We believe that our liquidity requirements and contractual obligations for at least the next 12 months will be adequately covered by cash provided by operations and the net proceeds from the sale of the Precision Sport segment after the settlement of the Restated Credit Agreement. Additionally, long-term contractual obligations are also currently expected to be funded from cash from operations and net proceeds from the sale of the Precision Sport segment after the settlement of the Restated Credit Agreement. For additional information regarding the Company’s credit facilities, see the section titled “Credit Agreement” below.
At December 31, 2024, we had total cash of $45,359, compared to cash of $11,324 at December 31, 2023. At December 31, 2024, the Company had $6,477 of the $45,359 in cash held by foreign entities, of which $4,665 is considered permanently reinvested.
The following presents a discussion of cash flows for the year ended December 31, 2024 compared with the year ended December 31, 2023, inclusive of continuing and discontinued operations.
| | | | | | |
|---|---|---|---|---|---|
| | Year Ended December 31, | ||||
| | 2024 | | 2023 | ||
| | | | | | |
| Net cash (used in) provided by operating activities | $ | (7,300) | | $ | 31,924 |
| Net cash provided by (used in) investing activities | | 165,160 | | | (11,416) |
| Net cash used in financing activities | | (123,239) | | | (20,255) |
| Effect of foreign exchange rates on cash | | (586) | | | (990) |
| Change in cash | | 34,035 | | | (737) |
| Cash, beginning of year | | 11,324 | | | 12,061 |
| Cash, end of period | $ | 45,359 | | $ | 11,324 |
Net Cash From Operating Activities
Net cash used in operating activities was $7,300 during the year ended December 31, 2024, compared to net cash provided by operating activities of $31,924 during the year ended December 31, 2023. The change in net cash (used in) provided by operating activities during 2024 is primarily due to the gain on sale of $40,585 related to the disposition of the Precision Sport segment, an increase in net loss of $42,141, and an increase in cash outflows related to working capital of $19,202, compared to the same period in 2023. These were partially offset by an increase in impairment of goodwill and indefinite-lived intangible assets at the Adventure segment of $44,809, as well as an increase in deferred income taxes of $22,530 during the year ended December 31, 2024, compared to the same period in 2023.
Free cash flow, defined as net cash (used in) provided by operating activities less capital expenditures, of ($14,039) was used during the year ended December 31, 2024 compared to $26,207 generated during the same period in 2023. The Company believes that the non-GAAP measure, free cash flow, provides an understanding of the capital required by the Company to expand its asset base. A reconciliation of free cash flows to comparable GAAP financial measures is set forth below, inclusive of continuing and discontinued operations:
| | | | | | |
|---|---|---|---|---|---|
| | Year Ended December 31, | ||||
| | 2024 | | 2023 | ||
| | | | | | |
| Net cash (used in) provided by operating activities | $ | (7,300) | | $ | 31,924 |
| Purchase of property and equipment | | (6,739) | | | (5,717) |
| Free cash flow | $ | (14,039) | | $ | 26,207 |
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Net Cash From Investing Activities
Net cash provided by investing activities was $165,160 during the year ended December 31, 2024 compared to net cash used in investing activities of $11,416 during the year ended December 31, 2023. The change in net cash provided by (used in) investing activities during the year ended December 31, 2024, is primarily due to the cash received related to the disposition of the Precision Sport segment, compared to the same period in 2023.
Net Cash From Financing Activities
Net cash used in financing activities was $123,239 during the year ended December 31, 2024, compared to net cash used in financing activities of $20,255 during the year ended December 31, 2023. The increase in cash used during the year ended December 31, 2024, compared to the same period in 2023 was primarily due to the settlement of all outstanding borrowings on our revolving credit facility and term debt under the Restated Credit Agreement.
Net Operating Loss
As of December 31, 2024, the Company had net operating loss carryforwards (“NOLs”) and research and experimentation credit for U.S. federal income tax purposes of $0 and $5,439, respectively.
As of December 31, 2024, the Company’s gross deferred tax asset was $35,658. The Company has recorded a valuation allowance of $23,344, resulting in a net deferred tax asset of $12,314, before deferred tax liabilities of $24,488. The Company has provided a full valuation allowance against all of the net U.S. deferred tax assets as of December 31, 2024, because the ultimate realization of those assets does not meet the more-likely-than-not criteria. The majority of the Company’s deferred tax assets consist of research and experimentation credits and capitalized costs for federal tax purposes. These deferred tax assets are expected to reverse into NOL carryforwards that can be used to offset taxable income and reduce income taxes payable in future periods. If a change in control were to occur, these future NOLs could be limited under Section 382 of the Internal Revenue Code of 1986 (“Code”), as amended.
Credit Agreement
Upon the closing of the sale of the Precision Sport segment on February 29, 2024, the Company terminated and settled all outstanding borrowings on our revolving credit facility and term debt under the Restated Credit Agreement.
Off-Balance Sheet Arrangements
We do not engage in any transactions or have relationships or other arrangements with unconsolidated entities. These include special purpose and similar entities or other off-balance sheet arrangements. We also do not engage in energy, weather or other commodity-based contracts.