Clarus Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts below are in millions of dollars, except per-share data. Clarus sells outdoor equipment under Black Diamond and PIEPS and ammunition components under Sierra. Sierra was acquired in August 2017, so 2017 comparative periods do not include Sierra sales or results.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $45.9 | $30.7 | $99.1 | $72.2 |
| Gross profit / margin | $15.9 / 34.6% | $9.0 / 29.5% | $33.7 / 34.0% | $21.3 / 29.5% |
| Operating income (loss) | $(0.1) | $(3.9) | $0.4 | $(4.1) |
| Net loss | $(0.8) | $(3.7) | $(0.4) | $(5.1) |
| Net loss per share, diluted | $(0.03) | $(0.12) | $(0.01) | $(0.17) |
| Operating cash flow | Not separately reported | Not separately reported | $7.9 | $(7.6) |
- Q2 revenue grew 49.5%; first-half revenue grew 37.3%. Sierra contributed $10.9 million in Q2 and $19.2 million in the first half. Management also cited higher quantities of outdoor products and favorable currency movements; currency added $0.8 million to Q2 sales and $2.4 million to first-half sales.
- Gross margin improved year over year, attributed to product mix, channel distribution and Sierra. First-half margin was partly offset by a 1.1 percentage-point impact from selling Sierra inventory marked up in purchase accounting.
- SG&A was $15.8 million in Q2 and $32.9 million in the first half, up 22.8% and 29.6%, respectively. The increases reflected Sierra, brand and product-development investments, and higher stock compensation. Transaction costs were $0.2 million in Q2 and $0.3 million in the first half.
- First-half free cash flow, a company-defined non-GAAP measure calculated as operating cash flow less capital expenditures, was $6.4 million, versus $(8.8) million a year earlier. Capital expenditures were $1.5 million. Cash increased $0.7 million from year-end to $2.6 million at June 30.
Liquidity, debt and material developments
- At June 30, current assets were $100.9 million and current liabilities $23.1 million. Cash was $2.6 million and inventory $61.2 million.
- Total debt, including capital leases, was $16.1 million, down from $20.8 million at year-end; debt less cash was approximately $13.5 million. The company had $16.0 million drawn under its new $75 million asset-based revolving facility, with approximately $47 million available under the borrowing base. The facility matures in June 2022, is secured by specified assets, and includes financial and other covenants.
- On June 27, Clarus replaced its former $40 million revolving credit arrangement with the JPMorgan-led facility. Q2 interest expense included a write-off of previously capitalized origination costs associated with the terminated facility.
- On July 11, after quarter-end, the company announced acceptance of 417,237 shares in its modified Dutch auction tender offer at $8 per share, for approximately $3.3 million before fees. On August 6 it announced a $0.025-per-share quarterly dividend, payable September 4 to holders of record August 20.
Outlook, risks and unusual items
- Management said cash from operations and the existing revolving facility were expected to cover liquidity needs for at least the next 12 months. The filing provides no numerical revenue, earnings or margin guidance.
- The ongoing 2015 restructuring relates to closure and liquidation of Black Diamond’s Zhuhai, China manufacturing operations; management expected only an immaterial amount of additional charges in the remainder of 2018.
- Legal matters arise in the ordinary course. The company did not expect pending disputes to materially affect its financial condition, results or cash flows, but disclosed a reasonable possibility of losses beyond recorded accruals that it could not reasonably estimate. It reported no pending product-liability claims believed in aggregate to be material.
- Risks highlighted include consumer demand, acquisition execution and integration, product liability, supplier and manufacturing disruptions, raw-material costs, foreign exchange, international trade restrictions and tariffs, and regulation affecting Sierra’s ammunition business. The filing specifically expanded discussion of trade-war and international-trade risks.
- Tax matters include $156.6 million of U.S. federal net operating loss carryforwards as of year-end 2017, potentially subject to Section 382 limitations. The company’s treatment of a foreign subsidiary dividend under the Tax Act remained subject to possible IRS guidance; an alternative interpretation could produce an estimated $2.5 million tax benefit. Management also noted uncertainty about state conformity to the Tax Act.
- Adoption of the new lease standard was expected to add approximately $2.4 million of lease liabilities and corresponding right-of-use assets, based on leases extending beyond the January 2019 adoption date.
Important facts for investors to verify
- How much of sales growth and improved profitability reflects Sierra versus organic growth in Black Diamond products, given the different comparative reporting scope.
- Whether gross-margin improvement and positive operating cash flow persist as product mix, inventory levels and working capital change.
- Borrowing-base availability, covenant compliance, interest costs and the effect of the secured credit facility on financial flexibility.
- The cash, share-count and covenant effects of the post-quarter tender offer and newly announced dividend.
- Potential effects of trade restrictions, litigation or tax-rule changes, including possible Section 382 limits on NOLs and unresolved Tax Act accounting matters.