Clarus Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 7, 2018. Amounts below are in U.S. dollars and millions unless otherwise noted.
Business context
Clarus develops and sells outdoor equipment under Black Diamond and PIEPS and high-performance bullets under Sierra. Sierra was acquired in August 2017, so reported Q1 2018 results include Sierra while Q1 2017 results generally do not; reported growth is therefore not fully comparable.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales | $53.267 | $41.556 |
| Gross profit; gross margin | $17.827; 33.5% | $12.300; 29.6% |
| Operating income (loss) | $0.494 | $(0.276) |
| Net income (loss) | $0.403 | $(1.455) |
| Diluted earnings (loss) per share | $0.01 | $(0.05) |
| Cash from operating activities | $7.255 | $1.981 |
| Capital expenditures | $0.853 | $0.426 |
| Free cash flow, as defined by the company | $6.402 | $1.555 |
- Sales increased 28.2%. Sierra contributed $8.240; management attributed the remaining increase to higher sales of climb, mountain and ski products and $1.651 of favorable foreign-currency effects. Black Diamond segment sales were $45.027 versus $41.556; Sierra sales were $8.240.
- Gross margin improved 3.9 percentage points, reflecting product mix and distribution-channel benefits and Sierra’s contribution, partly offset by a 1.9-point impact from selling inventory written up to fair value in acquisition accounting.
- SG&A rose 36.6% to $17.128, reflecting Sierra, increased brand, sales, marketing and R&D investment, and higher stock compensation. Q1 also included $0.165 of Sierra acquisition-related transaction costs.
- Net interest expense declined to $0.254 from $0.983, principally because the prior-year period included interest associated with subordinated notes repaid in February 2017. The Q1 2018 tax benefit was $0.042.
- Cash was $2.196 at quarter-end. Current assets were $96.010 and current liabilities $20.046. Debt totaled $14.852, including a $14.738 revolver draw and $0.114 capital lease; net of cash, debt was approximately $12.656.
- The company repaid $6.104 on revolving credit facilities during the quarter. Its Zions facility matures August 2022; $14.738 was drawn against stated availability of $38.750 at quarter-end, subject to facility terms, borrowing-base limitations and covenants.
Changes, outlook and risks
- Management said cash from operations improved mainly because of lower net operating assets and higher net income. Inventory declined to $53.122 from $58.138 between year-end and March 31.
- Management stated that operating cash flow and the existing revolver should cover liquidity requirements for at least the next 12 months. No specific earnings or revenue guidance was provided; management cautioned that quarterly results are not necessarily indicative of full-year results.
- The company is pursuing growth through product investment and acquisitions. Risks identified include consumer demand, Sierra integration, firearms- and ammunition-related regulation or public opinion, product liability, suppliers and manufacturing, foreign exchange, customer financial health, and the ability to use tax-loss carryforwards.
- Federal NOL carryforwards were $156.598 at December 31, 2017, subject to potential Section 382 limitations. The filing describes unresolved tax-law interpretation and valuation-allowance matters relating to the Tax Act; further guidance could affect the tax position.
- Legal matters are described as ordinary-course disputes; the company did not expect currently known matters to materially affect results, but disclosed that possible losses beyond accrued amounts cannot presently be reasonably estimated.
- The company expects approximately $2.4 of additional lease liabilities and right-of-use assets when the new lease standard is adopted in 2019, based on remaining operating-lease payments.
- The 2015 restructuring plan is expected to conclude in 2018, with only immaterial additional charges anticipated. Q1 restructuring expense was $0.040.
- Revenue recognition guidance was adopted January 1, 2018; the filing says its effects were immaterial. Management deemed disclosure controls effective, but excluded Sierra’s internal controls from its internal-control assessment.
Investor verification points
- Separate Sierra’s acquired contribution and foreign-exchange effects from underlying Black Diamond growth when assessing sales comparability.
- Review gross-margin sustainability and whether increased SG&A and brand investment produces improved operating profitability.
- Confirm revolver availability, borrowing-base capacity, covenant compliance and debt repayment progress.
- Monitor Sierra integration, the pending acquisition working-capital adjustment and any resulting change to purchase consideration or goodwill.
- Assess NOL usability and tax-accounting uncertainty, including possible ownership-change limitations and future guidance on Tax Act matters.
- Track lease-standard implementation, legal contingencies and completion of the restructuring plan.