Clarus Corp. (filing issuer: Black Diamond, Inc.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing states the company changed its name from Clarus Corporation to Black Diamond, Inc. in 2011. Unless otherwise stated, financial amounts below are in U.S. dollars and millions; per-share amounts are dollars.
Business context
Black Diamond designed and sold outdoor performance equipment and apparel under the Black Diamond and PIEPS brands. POC had been sold in October 2015 and is reported as discontinued operations; Gregory’s business was sold in 2014. Management was pursuing a strategy to redeploy cash into durable, cash-flow-producing assets and diversify the business.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $29.142 | $30.053 | $67.349 | $71.934 |
| Gross profit | $8.345 | $10.515 | $19.299 | $25.336 |
| Gross margin | 28.6% | 35.0% | 28.7% | 35.2% |
| Operating loss | $(1.951) | $(5.278) | $(5.824) | $(6.174) |
| Continuing-operations loss | $(3.171) | $(3.840) | $(7.184) | $(5.585) |
| Net loss | $(3.171) | $(5.447) | $(7.184) | $(7.122) |
| Diluted net loss per share | $(0.10) | $(0.17) | $(0.23) | $(0.22) |
- Q2 sales fell 3.0%; first-half sales fell 6.4%. Domestic sales grew, but international sales declined. Management attributed the declines primarily to weaker foreign currencies; first-half results also reflected lower ski-product volumes.
- Gross margin contracted as currency movements and higher costs from shifting manufacturing from China to the United States weighed on profitability. First-half margin was also affected by inventory written off after certain North American customer accounts filed for bankruptcy reorganization.
- SG&A declined 18.0% in Q2 and 11.6% for the first half, which management attributed mainly to restructuring savings. Operating losses narrowed, but first-half loss from continuing operations increased versus 2015, partly because the prior-year period included an income tax benefit.
- First-half operating cash flow was $5.743, versus $5.858 in 2015. Capital expenditures were $1.059. The cash-flow statement reports investing outflow of $1.957 and financing outflow of $3.967, the latter primarily reflecting share repurchases. Cash decreased $0.133 to $88.268.
Balance sheet, debt and liquidity
- At June 30, cash was $88.268 and marketable securities were $10.101. Current assets were $171.026 and current liabilities $40.611.
- Total debt carrying value was $20.988, all classified as current, principally 5% subordinated notes due May 2017. The company had no borrowings outstanding on its revolving facility; the balance sheet notes a $20.0 million facility, while MD&A describes a $30.0 million line including a $10.0 million accordion.
- Management stated that existing cash, marketable securities, operating cash flow and the revolving facility were expected to cover liquidity needs for at least the next 12 months. The company reported $13.735 of cash held by foreign entities and estimated $3.696 of tax liability if repatriated, potentially offset by tax-loss carryforwards.
- The company repurchased 553,462 shares in Q2 for approximately $2.305 million. The $30 million authorization had approximately $19.044 million remaining at June 30.
Material changes, outlook and notable items
- The company recorded a $1.967 million arbitration award related to claims against PIEPS’s former owner over the 2013 VECTOR transceiver recall; the arbitration was concluded.
- Restructuring charges were $0.993 million for the first half. Activities included workforce reductions, moving the European office from Basel to Innsbruck, and closing and liquidating manufacturing operations in Zhuhai, China. Management expected to complete the restructuring plans in 2016 and incur additional exit costs.
- First-half income tax expense was $0.341 million, including $0.597 million of discrete charges related to Swiss withholding tax and a potential liability from a Chinese tax audit. The company had substantial U.S. net operating loss carryforwards, which may be subject to limitation if a change in control occurs.
- No specific revenue or earnings guidance was provided. Management identified consumer demand, currency movements, manufacturing and supplier conditions, product liability, execution of its restructuring and diversification strategies, and use of tax-loss carryforwards among the risks to results.
- The filing states ordinary-course legal matters were not expected to have a material adverse effect, but possible losses above accrued amounts could not be reasonably estimated. No pending product-liability matters were identified as expected to be materially adverse in aggregate.
- Management concluded disclosure controls were effective as of June 30, 2016, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer identity and security being analyzed: the supplied filing is for Black Diamond, Inc., formerly Clarus Corporation.
- Review whether margin pressure from foreign exchange and the manufacturing transition persisted, and whether the Zhuhai closure and restructuring were completed on schedule and within expected costs.
- Monitor the 2017 maturity of the subordinated notes, covenant compliance, and the difference between the $20 million facility described in the debt note and the $30 million line described in MD&A.
- Assess the recoverability and potential Section 382 limitations of tax-loss carryforwards, alongside the discrete Swiss and Chinese tax exposures.
- The MD&A describes first-half free cash flow as $4.684 million provided, while its reconciliation table shows $5.743 million operating cash flow less $1.059 million capital spending, also $4.684 million; the prose comparison calls the 2015 amount “used” despite the table showing positive $4.230 million. Verify the intended 2015 presentation.