Clarus Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Comparisons are with Q1 2018 unless stated otherwise. Amounts are in millions of dollars except per-share data.
Business context
Clarus develops, manufactures and distributes outdoor equipment and lifestyle products through Black Diamond, PIEPS and SKINourishment, and bullets and ammunition through Sierra. The filing reports two segments: Black Diamond and Sierra.
Financial performance
- Revenue: $61.2 million, up 14.9%. Domestic sales rose 19.2% to $30.6 million; international sales rose 10.9% to $30.6 million. Management attributed growth to higher unit sales across product categories, partly offset by a $0.8 million foreign-exchange headwind.
- By segment: Black Diamond sales were $52.4 million, up from $45.0 million; Sierra sales were $8.8 million, up from $8.2 million.
- Gross profit and margin: $22.1 million and 36.0%, compared with $17.8 million and 33.5%. Management cited favorable product mix and channel distribution; the prior-year margin included a 1.9-point purchase-accounting inventory charge.
- Operating income: $4.4 million, versus $0.5 million. Operating expenses increased 1.8% to $17.6 million; SG&A increased 2.6% to $17.6 million, including continued sales, marketing and R&D investment.
- Net income and EPS: $3.8 million, or $0.13 basic and $0.12 diluted per share, compared with $0.4 million and $0.01 per share. Income tax expense was $0.3 million; the effective tax rate was 7.3%, versus 11.6%.
- Cash flow: Operating cash flow was $5.7 million, down from $7.3 million. Capital expenditures were $1.0 million; company-defined free cash flow was $4.7 million, versus $6.4 million. Investing cash use was $1.0 million and financing cash use was $4.6 million. Cash increased $0.04 million to $2.5 million.
- Liquidity and debt: Current assets were $107.5 million and current liabilities $20.5 million. Long-term debt was $18.3 million at quarter-end, down from total debt of $22.1 million at December 31, 2018. The company had drawn $18.3 million from its then-existing revolving facility, with approximately $32 million available.
- Other: The company paid $0.7 million in dividends ($0.025 per share) during the quarter. Inventory was $62.1 million, down from $64.9 million at year-end.
Changes and notable developments
- Segment operating income increased to $5.2 million for Black Diamond from $1.9 million, and to $1.7 million for Sierra from $0.8 million.
- Operating cash flow and free cash flow declined year over year despite higher net income; management attributed the operating cash-flow decrease primarily to an increase in net operating assets.
- On January 1, 2019, Clarus adopted the new lease standard and recorded $1.5 million of operating lease right-of-use assets and liabilities. The filing states the adoption had no material impact on reported results.
- On May 3, 2019, after quarter-end, Clarus entered a new credit agreement providing for a $60 million revolver and a term-loan facility of up to $40 million, with up to $50 million of additional commitments subject to conditions. The agreement matures May 3, 2024; the prior $75 million revolving agreement was terminated.
Outlook, risks and contingencies
The filing gives no specific revenue or earnings guidance. Management said it expected operating cash flows and the existing revolving facility to cover liquidity needs for at least the next 12 months. Future dividends remain subject to board approval; a subsequent dividend payment was approved for May 17, 2019.
Risks identified include consumer demand and economic conditions; foreign exchange, raw-material costs and tariffs; customer and supplier strength; acquisition execution and integration; product liability and warranty claims; firearms- and ammunition-related regulation and public opinion; intellectual-property and information-system risks; and the ability to use tax-loss carryforwards. The company reported no material change in risk factors from its 2018 Form 10-K. It said ordinary-course legal matters were not expected to have a material adverse effect, while noting possible losses beyond accrued amounts that could not then be reasonably estimated.
The new post-quarter credit agreement includes customary covenants, including a maximum consolidated leverage ratio of 3.0 to 1 and a minimum fixed-charge coverage ratio of 1.25 to 1, as well as restrictions on dividends and other actions subject to conditions and exceptions. The company’s federal NOLs were reported at $141.1 million as of December 31, 2018; their use may be limited by tax rules, including Section 382 in the event of a change in control.
Important facts for investors to verify
- Whether sales growth and gross-margin improvement persist, particularly by segment and product mix.
- Working-capital trends and cash conversion, given lower operating cash flow and the quarter’s cash balance.
- Borrowings, availability, pricing and covenant compliance under the May 3, 2019 credit agreement.
- The sustainability of dividends and the company’s ability to realize tax benefits from its NOLs.
- Potential unaccrued legal losses and exposure to product, regulatory, foreign-exchange and supply-chain risks.