Business context and reporting period
Black Diamond, Inc. (formerly Clarus Corporation) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company designs and sells outdoor equipment and apparel under the Black Diamond and PIEPS brands. Unless noted otherwise, amounts below are in U.S. dollars and thousands. The filing notes that interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Sales | $41,556 | $38,207; up 8.8% |
| Gross profit / margin | $12,300 / 29.6% | $10,954 / 28.7% |
| Operating loss | ($276) | ($3,873) |
| Net loss | ($1,455); ($0.05) per diluted share | ($4,013); ($0.13) per diluted share |
| Cash from operations | $1,981 | $1,031 |
| Capital expenditures / free cash flow | $426 / $1,555 | $603 / $428 |
| Cash and cash equivalents | $73,581 at March 31 | $94,738 at December 31, 2016 |
| Debt | $0 outstanding at March 31; $20,000 revolving facility undrawn | $21,898 current debt at December 31, 2016 |
Domestic and international sales each rose 8.8%. Management attributed the sales increase mainly to higher unit volumes in new and existing climbing, mountain and ski products; currency movements contributed $94. Gross margin improved with favorable product mix and channel distribution. The current ratio was approximately 7.3, based on current assets of $144,981 and current liabilities of $19,732.
Material changes and unusual items
- Selling, general and administrative expense fell 11.9% to $12,535, which management attributed to savings from the 2015 restructuring plan. Restructuring charges declined to $41 from $462; the remaining $91 accrual was expected to be paid during 2017.
- Cash declined by $21,157, primarily reflecting $22,713 in debt repayments. The company repaid the related-party subordinated notes in full on February 13, 2017. The $814 remaining note discount was expensed, contributing to interest expense of $983, up from $714.
- The company repurchased 2,669 shares for approximately $14 in March under its authorized program; $17,774 remained available under the program at quarter-end.
- Income tax expense was $210 versus a $138 benefit a year earlier, including a $133 discrete charge related to tax effects released from accumulated other comprehensive loss. The company reported $172,419 of federal NOL carryforwards at December 31, 2016, subject to potential Section 382 limitations.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management said cash, operating cash flow and the undrawn revolving facility were expected to cover liquidity needs for at least the next 12 months. The company continues to seek investments to redeploy cash and diversify its business; it did not identify a specific transaction or timetable.
The $20,000 revolving facility matures April 1, 2020 and includes financial and other restrictive covenants. Management identified risks including consumer demand, execution of its growth and diversification strategies, product liability and warranty claims, suppliers and manufacturing, foreign exchange, international operations, intellectual property, and the ability to use tax carryforwards. The company disclosed ordinary-course legal matters and a possibility of losses above accrued amounts, but said these could not currently be reasonably estimated; it did not believe current proceedings would materially adversely affect the company. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the filing issuer and period: the filing is by Black Diamond, Inc., formerly Clarus Corporation, for Q1 2017.
- Review whether improved sales and gross margin can persist, given the continuing net loss and the seasonal nature of interim results.
- Assess cash use after the debt repayment, future operating cash generation, and compliance with the revolving facility’s covenants.
- Evaluate the related-party nature of the repaid notes and the company’s plan to redeploy cash, including the risks and potential effect on NOL utilization.
- Review potential unaccrued legal losses and the valuation allowance and limitations applicable to tax assets.