Black Diamond, Inc. (formerly Clarus Corporation) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The company changed its name from Clarus Corporation to Black Diamond, Inc. in 2011. Unless otherwise noted, financial amounts below are in millions of dollars; the filing reports most figures in thousands.
Business context
Black Diamond designs and sells outdoor performance equipment and apparel, primarily under the Black Diamond and PIEPS brands. Following the 2015 sale of POC, results for the quarter reflect continuing operations. The company said it was seeking to redeploy sale proceeds and other cash into durable, cash-flow-producing assets, potentially outside the outdoor industry.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $38.2 | $41.9; down 8.8% |
| Gross profit / margin | $11.0 / 28.7% | $14.8 / 35.4% |
| Operating loss | $(3.9) | $(0.9) |
| Net loss | $(4.0) | $(1.7) |
| Loss per diluted share | $(0.13) | $(0.05) |
| Operating cash flow | $1.0 provided | $3.0 used |
| Free cash flow, as defined by the company | $0.4 provided | $3.7 used |
- Domestic sales rose 7.1% to $19.6 million; international sales fell 21.1% to $18.6 million. Management attributed the international decline partly to $2.1 million of foreign-exchange impact and lower ski-product volumes.
- Gross margin contracted amid currency weakness, costs from moving manufacturing from China to the United States, and an inventory write-off tied to North American accounts that filed for bankruptcy reorganization in April 2016.
- At March 31, cash was $86.3 million and marketable securities were $9.9 million, versus $88.4 million and $9.8 million at year-end 2015. Current assets were $175.2 million and current liabilities $19.5 million.
- Debt carrying value was $20.6 million, including $22.6 million principal on 5% subordinated notes due May 2017, offset by unamortized discount. The company reported no borrowing on its revolving facility. It also disclosed a $110,000 term note due March 2017.
- Operating cash flow improved year over year, primarily due to a smaller use of operating assets and liabilities. Investing cash use included a $0.9 million POC sale working-capital payment; financing cash use included share repurchases. Cash declined $2.1 million during the quarter.
Changes, outlook, and risks
- Compared with Q1 2015, revenue, gross profit, operating performance, and net income worsened; operating cash flow and free cash flow improved. SG&A declined 5.7% to $14.2 million, which management attributed to restructuring savings.
- The company provided no specific earnings or revenue guidance. Management believed existing cash, marketable securities, operating cash flow, and the revolving facility would cover liquidity needs for at least the next 12 months.
- A 2015 restructuring plan remained underway, with $0.5 million of restructuring charges in Q1 and remaining costs expected to be paid during 2016. The company also reported $0.1 million of transaction costs related to its redeployment and diversification strategy.
- Foreign-exchange exposure is managed with currency forwards and options. The quarter included a $0.7 million net foreign-currency translation gain in other comprehensive income, partly offset by a $0.7 million loss on hedging activities.
- Cash held by foreign entities was $14.0 million; repatriation was estimated to create $3.7 million of tax, potentially offset by net operating loss carryforwards. The company reported $165.9 million of U.S. NOLs available to offset taxable income, subject to tax rules including potential Section 382 limits. A substantial valuation allowance was recorded against deferred tax assets.
- The revolving credit agreement includes financial covenants and was amended in March 2016 to reduce the minimum net worth covenant for 2015, with annual increases thereafter. The filing describes a $30 million line inclusive of a $10 million accordion; a debt footnote describes a $20 million facility. The company reported no amount drawn.
- Related-party subordinated notes are payable to entities associated with directors, and interest payments were made to those parties during the quarter. The company disclosed ordinary-course legal matters and a possibility of losses exceeding accruals, but said amounts could not currently be reasonably estimated; management did not expect pending matters to have a material adverse effect.
- Management concluded disclosure controls were effective as of March 31, 2016 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the margin decline and reduced ski-product sales continued after Q1, and the ongoing effect of currency movements and the manufacturing transition.
- The financial exposure to the North American customers that entered bankruptcy reorganization, including potential further inventory or receivables losses.
- The exact available revolving-credit commitment and covenant requirements, and the company’s ability to meet them.
- Repayment and refinancing plans for the subordinated notes due in May 2017, including the related-party terms.
- Progress and expected cost of restructuring, and the nature and timing of any capital redeployment or diversification investment.
- The recoverability and potential tax limitations of NOLs, as well as possible losses from contingencies beyond recorded accruals.
- Reconcile the reported $1.662 million of financing cash use for treasury-stock purchases with the $1.518 million of repurchases disclosed under the stock repurchase program.