Black Diamond, Inc. — Form 10-Q, quarter ended June 30, 2014
Entity note: The request identifies Clarus Corp., but the supplied filing is for Black Diamond, Inc. (Commission file no. 001-34767). The summary below reflects the supplied filing. Financial amounts are in thousands of dollars, except per-share data.
Business context and reporting period
Black Diamond designs and sells outdoor performance equipment and apparel under the Black Diamond, POC and PIEPS brands. The filing reports the three and six months ended June 30, 2014, compared with the same 2013 periods. Gregory’s activities are presented as discontinued operations, and its assets and liabilities were classified as held for sale at quarter-end.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales from continuing operations | $34,422 | $29,162 | $78,854 | $69,779 |
| Gross profit | $12,344 | $10,549 | $28,986 | $25,335 |
| Gross margin | 35.9% | 36.2% | 36.8% | 36.3% |
| Operating loss | $(6,050) | $(5,591) | $(10,221) | $(10,205) |
| Loss from continuing operations | $(4,443) | $(4,181) | $(7,845) | $(8,032) |
| Net loss | $(4,983) | $(2,268) | $(6,310) | $(5,300) |
| Net loss per diluted share | $(0.15) | $(0.07) | $(0.19) | $(0.17) |
- Cash flow: Six-month operating cash flow was $(7,669), versus positive $3,629 in 2013. Capital expenditures were $1,382; company-defined free cash flow was $(9,051), versus positive $1,085. Financing provided $9,360, primarily from $9,200 of net revolving-credit borrowing. Cash at June 30 was $4,605.
- Liquidity and debt: Current assets were $143,046 and current liabilities $60,485. Total debt was $47,333, of which $29,437 was classified current. The company reported compliance with its debt covenants at June 30.
- Balance sheet: Total assets were $324,511 and stockholders’ equity was $240,069. Inventory was $57,090, up from $54,054 at year-end 2013.
Material changes versus prior comparable periods
- Q2 continuing sales rose 18.0%; six-month sales rose 13.0%. Management attributed growth to higher product volumes, apparel, POC’s road-cycling launch, and foreign-currency effects.
- Q2 gross margin edged down from 36.2% to 35.9%, which management attributed to unfavorable product and channel mix. The six-month margin improved from 36.3% to 36.8% on favorable mix.
- SG&A increased to $17,984 in Q2 and $38,797 for six months, reflecting investment in apparel, POC’s in-house distribution operations and the road-cycling launch. A $410 restructuring charge related to a reduction in force was recorded in the first half.
- Q2 discontinued operations recorded a $540 loss, versus $1,913 income a year earlier; six-month discontinued-operations income fell to $1,535 from $2,732. Sale-related transaction costs and weaker Gregory sales/gross profit were cited among the causes.
- Operating cash flow deteriorated substantially, principally because working capital increased, including inventory built for the fall 2014 selling season, and profitability declined.
Outlook, significant events and risks
- On June 18, the company agreed to sell Gregory assets to Samsonite for $85,000 cash, subject to a stated $865 working-capital adjustment, and the sale closed July 23. The company expected to recognize a gain; the filing does not provide the final gain amount.
- After the sale closed, the company paid off the Zions revolving-credit balance and term-facility amounts. These are subsequent events and were not reflected in June 30 balances.
- No specific revenue or earnings guidance is provided. Management said liquidity needs for at least the next 12 months were expected to be covered by cash, operating cash flow and existing revolving facilities, as well as identifying Gregory-sale proceeds as a funding source for expansion and investment.
- Risks highlighted include consumer demand and economic conditions, customer financial strength, execution of growth initiatives and acquisitions, product liability and warranty exposure, suppliers and manufacturing stability, raw-material costs, foreign exchange, international-market risks, intellectual-property protection and the ability to use tax-loss carryforwards.
- Management cited uncertainty in realizing deferred tax assets: approximately $187,000 of future U.S. taxable income was needed for realization, including approximately $163,000 by 2022 for relevant NOLs. Failure to meet projections could require a higher valuation allowance.
- The company disclosed related-party 5% subordinated notes issued in connection with the Gregory acquisition to entities associated with executive directors, and reported interest payments to those holders. It reported no legal proceedings expected, based on currently available information, to materially adversely affect its financial position, results or cash flows.
Important facts for investors to verify
- Confirm the intended issuer: this source is Black Diamond, Inc., not Clarus Corp.
- Review the Gregory sale’s final proceeds, closing adjustments, debt repayment and recognized gain when reported.
- Track post-sale liquidity, debt balances and cash generation, especially given first-half negative operating and free cash flow.
- Assess whether inventory converts to sales in the fall season and whether sales growth supports improved operating results and margins.
- Monitor deferred-tax-asset realizability, foreign-currency exposure and any changes in the risks or contingencies disclosed.