Clarus Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 4, 2019. Amounts are in millions of dollars unless otherwise noted. Clarus sells outdoor equipment and apparel through Black Diamond, PIEPS and SKINourishment, and bullets and ammunition through Sierra.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $60.2 | $55.7 | $168.4 | $154.8 |
| Gross profit / margin | $20.6 / 34.1% | $19.9 / 35.7% | $58.6 / 34.8% | $53.5 / 34.6% |
| Operating income | $4.1 | $4.0 | $7.3 | $4.4 |
| Net income | $3.5 | $4.1 | $6.6 | $3.8 |
| Diluted EPS | $0.11 | $0.14 | $0.21 | $0.12 |
| Operating cash flow | — | — | $5.6 | $7.6 |
| Capital expenditures | — | — | $2.8 | $1.9 |
Q3 revenue rose 8.1%, but gross margin fell 1.6 percentage points. Management attributed the margin pressure to lower-margin channel mix and foreign currency. Q3 operating income was nearly flat and net income declined, with other expense worsening to $0.8 million from $0.2 million, primarily from foreign-currency remeasurement losses. For the first nine months, revenue increased 8.8%, operating income rose to $7.3 million, and net income grew to $6.6 million; gross margin edged up to 34.8%, which management attributed to favorable product mix.
For Q3, Black Diamond sales were $53.8 million versus $47.3 million, while Sierra sales declined to $6.5 million from $8.4 million. Black Diamond segment operating income increased to $5.4 million from $4.6 million; Sierra segment operating income decreased to $0.7 million from $1.5 million. Nine-month sales growth came from climb, mountain and ski products, partly offset by weaker sport products and $1.9 million of adverse currency translation.
Cash, liquidity and capital structure
At September 30, 2019, cash was $1.9 million, current assets $122.3 million and current liabilities $28.3 million; working capital was $94.0 million. Inventory was $73.5 million, up from $64.9 million at year-end 2018. Long-term debt was $24.9 million, with no current portion. The company had drawn $24.9 million of its $60 million revolving facility, with $40 million of term-loan capacity available through May 3, 2020. The facility matures May 3, 2024; the reported borrowing rate was 3.5625%.
Nine-month operating cash flow fell to $5.6 million from $7.6 million, primarily because of higher operating assets and liabilities, including accounts receivable and inventory. Free cash flow, defined by the company as operating cash flow less capital expenditures, was $2.8 million versus $5.8 million. Cash declined $0.6 million during the period. Financing included $4.2 million of share repurchases and $2.2 million of dividends. The board approved a further $0.025-per-share dividend for November 2019. Management stated that operating cash flow and the existing revolving facility should cover liquidity needs for at least the next 12 months.
Outlook, risks and notable items
- The filing provides no quantitative revenue or earnings guidance. Management described continued investment in sales, marketing, research and development, direct-to-consumer activity and warehousing.
- Key risks cited include consumer demand and economic conditions; foreign exchange; customer financial strength; acquisition execution; product liability and warranties; suppliers and raw materials; information systems; regulation affecting ammunition and firearms; tax matters and use of net operating losses; and maintaining the dividend.
- The company reported ordinary-course legal matters and said it did not believe current proceedings would materially adversely affect results. It also disclosed a reasonable possibility of losses above accrued amounts, which could not be reasonably estimated. No pending product liability claims were identified as collectively material.
- Tax benefits included a $1.3 million release of valuation allowance, a $0.6 million stock-compensation windfall benefit and a $0.1 million tax-reserve release during the nine-month period. Realization of deferred tax assets depends on future taxable income; NOLs may be limited by Section 382 after a change in control.
- Clarus adopted lease accounting guidance in 2019, recording $1.5 million of lease assets and liabilities at adoption. At quarter-end, operating lease liabilities totaled $1.3 million.
Important facts for investors to verify
- Whether sales growth and margin trends persist, particularly Q3 gross-margin pressure and Sierra’s lower sales and segment income.
- Working-capital conversion: cash flow weakened as inventory and receivables increased, despite higher net income.
- Revolver availability, borrowing costs and compliance with credit-agreement terms; the filing does not state unused capacity net of any letters of credit.
- The sustainability of tax benefits, NOL utilization and valuation-allowance judgments.
- Potential unquantified legal losses and the company’s ability to maintain its dividend and repurchase activity.