Clarus Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Clarus sells outdoor and lifestyle products through Black Diamond, PIEPS and SKINourishment, and bullets and ammunition through Sierra. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Sales | $30.0 | $47.0 | $83.6 | $108.2 |
| Gross profit / margin | $10.6 / 35.4% | $16.0 / 34.0% | $29.1 / 34.9% | $38.0 / 35.2% |
| Operating income (loss) | $(4.0) | $(1.2) | $(3.1) | $3.2 |
| Net income (loss) | $(2.7) | $(0.7) | $(2.7) | $3.1 |
| Diluted earnings (loss) per share | $(0.09) | $(0.02) | $(0.09) | $0.10 |
| Operating cash flow | Not presented separately | Not presented separately | $14.4 | $9.7 |
Q2 sales fell 36.1% year over year; first-half sales fell 22.8%. Domestic and international Q2 sales declined 28.7% and 47.5%, respectively. Management attributed the declines mainly to COVID-19-related demand weakness in Black Diamond’s climb, mountain and ski products. Q2 gross margin rose 1.4 percentage points, reflecting product mix, but first-half gross margin declined 0.3 points, with supply-chain, logistics, currency and tariff pressures. SG&A fell 15.7% in Q2 and 8.4% in the first half, primarily due to cost reductions.
Q2 Black Diamond sales were $20.2 million versus $37.8 million a year earlier, while Sierra sales increased to $9.8 million from $9.1 million. For the first half, Black Diamond sales were $66.0 million versus $90.2 million; Sierra sales were $17.6 million versus $18.0 million.
Cash, liquidity and debt
- Cash was $21.5 million at June 30, 2020, compared with $1.7 million at year-end 2019. Current assets were $122.7 million and current liabilities $23.2 million.
- First-half operating cash flow was $14.4 million; capital expenditures were $2.0 million, yielding company-defined free cash flow of $12.4 million. Operating cash flow benefited substantially from a $17.7 million reduction in accounts receivable.
- Total debt was $30.5 million, including $4.0 million current; year-end debt was $22.7 million. The company reported approximately $50.4 million available on its $60 million revolving facility and compliance with debt covenants at quarter-end.
- Clarus borrowed $20 million under its term facility in April, using the proceeds to pay down revolving borrowings. Quarterly principal payments of $1 million begin September 30, 2020; the facility matures May 3, 2024.
Outlook, risks and notable items
- Management expected Q2 to be the most significantly affected quarter, with sequential improvement through the rest of 2020. It nevertheless expected COVID-19 to adversely affect future sales and profitability; the duration and magnitude were not estimable. No specific earnings or revenue guidance was provided.
- Mitigation actions included cost reductions, workforce reductions and furloughs, production adjustments, lower discretionary spending, postponed nonessential capital expenditures, and suspended share repurchases and cash dividends. The quarterly cash dividend was replaced by a stock dividend; the company announced this arrangement would continue for Q3 2020.
- Management warned prolonged disruption could affect liquidity, covenant compliance and asset values, potentially leading to impairment charges, write-offs or reserves. Other cited risks include foreign exchange, tariffs, supplier and customer disruption, and regulation or public opinion affecting ammunition and firearms.
- Income tax benefits were $1.1 million in both Q2 and the first half of 2020. At December 31, 2019, federal NOL carryforwards were $131.6 million, subject to possible Section 382 limitations; a $28.6 million valuation allowance had been recorded against deferred tax assets.
- The company reported ordinary-course legal matters and a possibility of losses exceeding accrued amounts, but said potential excess losses could not currently be reasonably estimated. It did not expect the disclosed matters to have a material adverse effect based on currently available information.
Most important facts for investors to verify
- Whether the anticipated post-Q2 sequential recovery occurred, particularly in Black Diamond’s international and climb, mountain and ski sales.
- Whether operating cash flow remains adequate as working-capital movements normalize, and whether COVID-19 effects create inventory, receivable or impairment risks.
- Debt repayment, covenant headroom and availability under the revolving facility as operating conditions evolve.
- Future dividend policy and the realization and potential Section 382 limitations of tax attributes.
- Any material developments in legal contingencies, supply-chain disruption, tariffs or currency exposure.