Clarus Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 5, 2019. Amounts are in thousands of dollars unless noted. Clarus sells outdoor and lifestyle products through Black Diamond, PIEPS and SKINourishment, and bullets and ammunition through Sierra.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Sales | $46,994 | $45,881 | $108,212 | $99,148 |
| Gross profit / margin | $15,992 / 34.0% | $15,860 / 34.6% | $38,048 / 35.2% | $33,687 / 34.0% |
| Operating income (loss) | $(1,241) | $(123) | $3,176 | $371 |
| Net income (loss) | $(694) | $(777) | $3,093 | $(374) |
| Basic and diluted earnings (loss) per share | $(0.02) | $(0.03) | $0.10 | $(0.01) |
| Operating cash flow | Not presented quarterly | $9,672 | $7,915 |
- Q2 sales rose 2.4% year over year; first-half sales rose 9.1%. First-half growth was led by climb, mountain and ski products; stronger U.S. dollar reduced sales by $1,133 for the half.
- Q2 operating loss widened as SG&A grew 8.9% to $17,192, including increased brand marketing and direct-to-consumer investment, trade-show timing, European warehouse relocation costs and higher stock compensation. First-half SG&A rose 5.6% to $34,772.
- Q2 gross margin declined 0.6 percentage points, attributed to lower-margin channel mix and foreign currency impacts. First-half margin improved 1.2 points, reflecting favorable product and channel mix; the prior-year period included a 1.1-point impact from acquisition-accounting inventory.
- First-half segment sales: Black Diamond $90,246, up from $79,980; Sierra $17,966, down from $19,168. Q2 Black Diamond sales were $37,845 versus $34,953; Sierra sales were $9,149 versus $10,928. First-half segment operating income was $4,708 for Black Diamond and $3,079 for Sierra.
- First-half free cash flow, a company-defined non-GAAP measure (operating cash flow less capital expenditures), was $7,678 versus $6,397. Capital expenditures were $1,994.
Balance sheet, liquidity and capital
- At June 30, 2019, cash was $1,969, current assets $112,413 and current liabilities $28,373. Inventories were $73,024, up from $64,933 at year-end 2018.
- Long-term debt was $16,650, down from $22,105 at December 31, 2018. The May 2019 JPMorgan credit agreement provides a $60,000 revolver and a $40,000 term loan available through May 3, 2020; neither the term loan nor the optional additional commitments had been drawn. The agreement matures May 3, 2024. The drawn-loan rate was 4.3055% at quarter-end.
- Management said cash from operations and the revolver should cover liquidity requirements for at least the next 12 months. First-half financing cash use was $8,195, including net revolver repayments, $1,505 of treasury-stock purchases and $1,494 of dividends; cash declined $517 during the half.
- The company paid quarterly dividends of $0.025 per share in each first-half quarter and announced another $0.025 dividend for August 2019, subject to the board’s continuing discretion.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described ongoing investment in product introductions, sales, marketing, research and development, and brand equity, and stated that it continues to seek acquisition and growth opportunities.
- Q2 included a $679 income-tax benefit, including a $560 stock-compensation windfall benefit. First-half tax benefits included a $590 stock-compensation windfall and a $63 tax-reserve release; management also cited a release of part of the deferred-tax valuation allowance based on forecast earnings. First-half results therefore include material tax-related benefits.
- Clarus reported $141,067 of federal net operating loss carryforwards and $3,791 of research and experimentation credits at December 31, 2018. A change in control could limit NOL use under Section 382; the company maintains a substantial valuation allowance against deferred tax assets.
- Foreign-currency movements affect reported sales and earnings. The company uses cash-flow hedges; first-half hedge-related unrealized losses contributed to other comprehensive loss. Sierra’s ammunition business is exposed to regulatory, legislative and public-opinion risks.
- The company reported ordinary-course legal matters and said a material adverse outcome was not considered reasonably possible based on currently available information, but possible losses exceeding accruals could not be reasonably estimated. No pending product-liability claims were identified as material in aggregate.
- Management concluded disclosure controls were effective as of June 30, 2019; no material change in internal control was reported. The filing stated that risk factors were not materially changed from the 2018 Form 10-K.
Investor verification points
- Assess whether Black Diamond growth can offset continued weakness in Sierra, and track the product and channel mix underlying gross margins.
- Monitor inventory growth, cash conversion and seasonal working-capital needs, alongside the limited cash balance and available revolver capacity.
- Review the tax-benefit components and assumptions supporting deferred-tax-asset valuation allowances and expected NOL utilization.
- Check the new credit agreement’s covenants, borrowing availability and any future use of the undrawn term-loan commitment.
- Follow foreign-exchange effects, hedge positions, and any developments in legal, product-liability or ammunition-related regulatory matters.