Clarus Corporation — Q1 2020 Form 10-Q
Business and reporting period. Clarus designs and sells outdoor and lifestyle products through Black Diamond, PIEPS, and SKINourishment, and bullets and ammunition through Sierra. This unaudited report covers the three months ended March 31, 2020; financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $53.6 | $61.2 | Down 12.5% |
| Gross profit / margin | $18.5 / 34.6% | $22.1 / 36.0% | Profit down 16.1%; margin down 1.4 percentage points |
| Operating income | $0.9 | $4.4 | Down $3.5 |
| Net income | $0.04 | $3.8 | Basic and diluted EPS rounded to $0.00, versus $0.13 and $0.12 |
| Operating cash flow | $3.5 | $5.7 | Down $2.2 |
| Free cash flow | $2.2 | $4.7 | Down $2.5 |
- Domestic sales were $28.5 million, down 6.7%; international sales were $25.0 million, down 18.4%. Black Diamond sales fell to $45.8 million from $52.4 million; Sierra sales fell to $7.8 million from $8.8 million.
- Operating expenses were nearly unchanged at $17.6 million. Other expense rose to $0.8 million, principally due to remeasurement losses on foreign-currency receivables and payables.
- Cash was $12.8 million at quarter-end, versus $1.7 million at December 31, 2019. Current assets were $126.9 million and current liabilities $19.9 million.
- Long-term debt was $32.1 million, up from $22.7 million at year-end. Clarus had drawn $32.1 million of its $60 million revolving facility and reported approximately $27.9 million of availability. The company was in compliance with debt covenants at March 31.
- Operating cash flow was supported by working-capital movements, including a $4.1 million inventory reduction and $2.6 million decrease in receivables; accounts payable and accrued liabilities used $4.7 million. Capital expenditures were $1.3 million, and cash dividends paid were $0.7 million.
Material changes, outlook, and risks
- Management attributed lower sales primarily to COVID-19-related demand declines, especially in climb, mountain, and ski products late in March. Foreign exchange also reduced sales by $0.4 million. Supply-chain and logistics disruption, currency, and tariffs weighed on gross margin.
- Management expected Q2 2020 to be the most significantly affected quarter, with sequential improvement through the rest of the year. It provided no numerical full-year guidance and cautioned that the pandemic’s duration and financial impact could not be estimated reliably.
- Mitigation actions included reducing operating costs and discretionary spending, adjusting production, furloughs and workforce reductions, postponing nonessential capital expenditures, drawing on credit, and suspending share repurchases and cash dividends. On May 1, the company announced a temporary stock dividend in place of the regular cash dividend.
- On April 30, 2020, Clarus borrowed $20 million under its term-loan facility and used the proceeds to repay revolving borrowings. Quarterly principal payments of $1 million begin September 30, 2020; remaining amounts mature May 3, 2024.
- The planned acquisition of S.K.B. Corporation expired by mutual agreement on April 30, citing pandemic-related uncertainty. Q1 included $0.25 million of transaction costs related to the acquisition effort.
- Management warned that sustained disruption could impair goodwill, intangible assets, property and equipment, inventory, receivables, and tax assets, and could affect liquidity or covenant compliance. The filing also cites consumer demand, supply-chain disruption, product liability, ammunition regulation, foreign exchange, and the ability to maintain dividends as risks.
- Ordinary-course legal matters were not expected to have a material adverse effect based on information then available, but possible losses above recorded accruals could not be reasonably estimated. No pending product-liability claims were identified as materially adverse in the aggregate.
Most important facts for investors to verify
- Subsequent-quarter sales, margins, cash generation, and the pace of recovery after the pandemic-related Q1 demand decline.
- Liquidity and debt levels after the $20 million term-loan draw, including covenant headroom, repayment obligations, and available revolving capacity.
- Whether cost reductions and production changes offset weaker demand, and whether asset impairment or inventory reserves become necessary.
- The effect of replacing cash dividends with stock dividends and whether cash dividends resume.
- Any developments in legal contingencies, foreign-exchange exposure, and the company’s ability to realize deferred tax assets and use its net operating loss carryforwards.