Clarus Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited consolidated results. Unless noted otherwise, dollar amounts below are in millions; the filing presents amounts in thousands.
Business context
Clarus develops and sells outdoor equipment and apparel through Black Diamond and PIEPS, and high-performance bullets through Sierra. Sierra was acquired in August 2017, so comparisons with 2017 include Sierra for only part of the nine-month period.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $55.7 | $45.8 | $154.8 | $118.0 |
| Gross profit / margin | $19.9 / 35.7% | $15.3 / 33.4% | $53.5 / 34.6% | $36.6 / 31.0% |
| Operating income (loss) | $4.0 | $(1.0) | $4.4 | $(5.2) |
| Net income (loss) | $4.1 | $(1.6) | $3.8 | $(6.7) |
| Diluted EPS | $0.14 | $(0.05) | $0.12 | $(0.22) |
- Nine-month operating cash flow was $7.6, versus cash used of $16.6 in 2017. Capital expenditures were $1.9; company-defined free cash flow was $5.8, versus negative $18.5.
- Cash was $3.0 at September 30, 2018, compared with $1.9 at December 31, 2017. Current assets were $107.5 and current liabilities $21.8.
- Total debt, including capital leases, was $22.7, compared with $20.8 at year-end 2017. Net interest expense was $1.0 for the first nine months.
- Under its June 2018 asset-based revolving facility, Clarus had drawn $22.6 of approximately $49.0 then available; the facility matures June 2022 and has a $75.0 commitment, subject to borrowing-base limits and covenants.
Material changes versus comparable periods
- Q3 revenue rose 21.7%; nine-month revenue rose 31.2%. Management attributed growth to Sierra, higher sales of climb and mountain products, and favorable currency movements, partly offset by lower ski-product sales.
- Sierra contributed $8.4 of Q3 sales and $27.6 for the nine-month period. Black Diamond segment sales were $47.3 in Q3 and $127.2 for nine months; Sierra sales were $8.4 and $27.6, respectively.
- Gross margin improved 2.3 percentage points in Q3 and 3.6 points for the nine-month period. Management cited product and channel mix and Sierra; purchase-accounting inventory effects partly offset the nine-month improvement.
- SG&A increased 9.3% in Q3 and 22.3% for nine months, reflecting Sierra, investment in sales, marketing, research and development, and fulfillment, and higher stock compensation. Acquisition-related transaction costs fell substantially versus 2017.
- Operating results moved from losses to profits in both comparisons. The 2018 nine-month income-tax benefit included discrete tax benefits, including a $0.4 stock-award-related windfall.
Outlook, commentary, risks, and unusual items
- Management stated that cash from operations and the revolving facility should cover liquidity needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- The company completed a modified Dutch auction in July, repurchasing 417,237 shares at $8.00 each for approximately $3.3 million. It began a quarterly dividend program of $0.025 per share; future dividends remain subject to Board approval.
- Risks highlighted include consumer demand and economic conditions; acquisition execution and integration; Sierra-related regulation and public opinion concerning ammunition; product liability and warranty exposure; suppliers, manufacturing, raw materials, currency, information systems, intellectual property, and use of tax-loss carryforwards.
- Legal matters arise in the ordinary course. Clarus reported that possible losses above recorded accruals cannot currently be reasonably estimated, while stating it did not expect pending matters to have a material adverse effect based on available information.
- Adoption of the new revenue standard had an immaterial financial impact. The company expected lease accounting adoption in 2019 to add approximately $1.3 million of lease liabilities and corresponding right-of-use assets.
- Management concluded disclosure controls were effective as of September 30, 2018. No material changes in risk factors or market-risk disclosures were reported.
Important facts for investors to verify
- How much of reported growth and margin improvement is sustainable organic performance versus Sierra’s contribution, product mix, currency, and purchase-accounting effects.
- Whether operating cash generation remains adequate as receivables and inventory expand, and how much borrowing capacity remains under the borrowing-base facility.
- The sustainability of earnings given higher SG&A, interest costs, and the discrete tax benefits affecting the reported tax rate.
- Future dividend decisions, covenant headroom, and the company’s plans for acquisition spending and share repurchases.
- Potential limitations on the company’s $156.6 million of federal NOL carryforwards, including possible Section 382 restrictions, and the eventual impact of lease-standard adoption.