Black Diamond, Inc. (formerly Clarus Corporation) — Q2 2017 Form 10-Q
Period: Quarter and six months ended June 30, 2017. The filing is by Black Diamond, Inc.; the company changed its name from Clarus Corporation in 2011. Unless stated otherwise, financial amounts below are USD millions.
Business context
The company designs and sells outdoor equipment and apparel under the Black Diamond and PIEPS brands. Gregory and POC had previously been divested. Management described a strategy to grow existing product lines and redeploy cash into durable, cash-generating assets, potentially outside the outdoor industry.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $30.680 | $29.142 | $72.236 | $67.349 |
| Gross profit / margin | $9.038 / 29.5% | $8.345 / 28.6% | $21.338 / 29.5% | $19.299 / 28.7% |
| Operating loss | $(3.864) | $(1.951) | $(4.140) | $(5.824) |
| Net loss | $(3.654) | $(3.171) | $(5.109) | $(7.184) |
| Net loss per share | $(0.12) | $(0.10) | $(0.17) | $(0.23) |
| Operating cash flow | Not separately presented | $(7.619) | $5.743 |
- Q2 sales rose 5.3%; domestic sales increased 2.2% and international sales 9.4%. For the six-month period, sales rose 7.3%.
- Management attributed sales growth mainly to higher unit volumes in climbing, mountain and ski products. Gross margin improved on favorable product and channel mix; the six-month comparison also benefited from lower costs after manufacturing activities shifted from China to the United States.
- Q2 operating loss widened despite higher gross profit: SG&A increased 10.9% to $12.860 million, reflecting brand, sales, marketing and R&D investment and higher stock compensation. The prior-year quarter included a $1.967 million arbitration award credit and higher restructuring and transaction costs, affecting the comparison.
- Six-month operating loss narrowed, while net loss improved. Lower interest expense, following debt repayment, contributed to the improvement.
- Six-month free cash flow, as defined by the company as operating cash flow less capital expenditures, was negative $8.767 million, versus positive $4.684 million a year earlier.
Balance sheet, liquidity and debt
- At June 30, cash and cash equivalents were $63.433 million, down from $94.738 million at December 31, 2016. Total current assets were $143.080 million and current liabilities $21.048 million.
- Inventory increased to $54.812 million from $45.410 million at year-end. Management cited a $15.651 million increase in net operating assets/non-cash working capital as the principal reason operating cash flow turned negative.
- No debt was outstanding at June 30. The company repaid $22.716 million of long-term debt during the first half, including related-party subordinated notes paid in full on February 13, 2017. It had a $20 million revolving facility, maturing April 2020, with no amount drawn.
- Management said existing cash, operating cash flows and the revolving facility were expected to cover liquidity needs for at least the next 12 months. Of cash held by foreign entities, $10.917 million was outside the U.S.; estimated tax on repatriation was $3.608 million, which management said could be offset by net operating loss carryforwards.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or margin guidance. Management expected only an immaterial amount of further restructuring charges in the remainder of 2017.
- The company continued to pursue investment opportunities as part of its diversification and capital-redeployment strategy; the filing gives no timetable or expected returns.
- Risks highlighted include consumer demand, execution of growth and diversification plans, product liability and warranty claims, supply and manufacturing stability, raw-material availability and cost, foreign-exchange movements, international-market risks, and the ability to use tax-loss carryforwards. The company said risk factors had not materially changed from its 2016 Form 10-K.
- The Chinese tax audit liability was settled and paid for $0.939 million in Q2. The company disclosed that losses from contingencies could exceed accrued amounts, but said possible excess losses could not be reasonably estimated; it did not expect current legal matters to have a material adverse effect based on information available.
- For the six months, foreign-currency translation increased other comprehensive income, while hedging activity reduced it. The company used currency forwards and options to manage exchange-rate risk.
- Management assessed disclosure controls as effective at June 30, 2017, and reported no material change in internal control over financial reporting during the quarter. On August 4, 2017, the board amended the bylaws concerning director removal.
Important facts for investors to verify
- Reconcile the second-quarter repurchase disclosure: the issuer-repurchase table reports 504 thousand shares purchased for $2.663 million, while the six-month cash-flow statement reports only $17 thousand of treasury-stock purchases.
- Assess whether higher inventory and negative operating cash flow reflect planned seasonal/product investment or a sustained working-capital burden.
- Track whether sales growth and improved gross margins translate into operating profitability, given increased brand and product-development spending.
- Review revolving-credit covenant headroom and the terms and related-party aspects of the subordinated-note repayment.
- Evaluate the assumptions supporting the use and potential limitations of tax-loss carryforwards, including possible Section 382 limits after a change in control.