Black Diamond, Inc. (formerly Clarus Corporation) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The filing is by Black Diamond, Inc.; it states the company changed its name from Clarus Corporation in 2011. Financial amounts below are in millions unless stated otherwise.
Business context and key financial metrics
The company designs and sells outdoor performance equipment and apparel through its Black Diamond and PIEPS brands. POC was sold in October 2015 and is reported as discontinued operations. Management was seeking to redeploy cash into durable, cash-flow-producing investments, potentially outside the outdoor industry.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $39.4 | $39.3 | $106.8 | $111.2 |
| Gross profit / margin | $12.3 / 31.3% | $14.1 / 36.0% | $31.6 / 29.6% | $39.5 / 35.5% |
| Operating income (loss) | $0.6 | $(0.8) | $(5.3) | $(7.0) |
| Net loss | $(0.4) | $(49.7) | $(7.6) | $(56.8) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $5.4 | $(4.9) |
- At September 30, cash was $96.0, with no marketable securities reported. Cash was $88.4 plus $9.8 of marketable securities at December 31, 2015.
- Free cash flow, defined by the company as operating cash flow less capital expenditures, was $3.4 for the nine months, versus $(7.2) in 2015. Investing cash flow was $7.3, including $10.2 of marketable-security sale proceeds; financing cash flow was $(5.2), mainly from share repurchases.
- Debt carrying value was $21.4, all current at quarter-end, primarily 5% subordinated notes due May 28, 2017. The company reported no borrowings on its revolving facility. The filing describes a $30.0 line including a $10.0 accordion in MD&A, while the debt note refers to a $20.0 facility.
- Total current assets were $170.8 and current liabilities $43.4. The company said existing cash, operating cash flow and its revolving facility should cover liquidity needs for at least 12 months.
Material changes versus comparable periods
- Q3 sales increased 0.5%; domestic sales grew 4.4%, while international sales fell 2.6%. For the nine months, revenue declined 4.0%, with domestic growth offset by lower international sales.
- Gross margin fell in both comparisons. Management cited currency weakness, unfavorable product and channel mix, higher costs as manufacturing shifted from China to the U.S., and, for the nine-month period, inventory written off after certain North American customer accounts filed for bankruptcy reorganization.
- SG&A declined 19.4% in Q3 and 14.2% year to date, primarily reflecting savings from restructuring. Restructuring charges were $0.3 in Q3 and $1.3 for nine months.
- Year-to-date operating loss improved to $5.3 from $7.0, including a $2.0 arbitration award related to the prior PIEPS VECTOR recall, recorded as a reduction of operating expenses.
- Comparative 2015 net losses were heavily affected by large deferred-tax valuation allowance charges. Thus the much smaller 2016 net losses do not reflect operating performance alone.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management expected to complete restructuring plans in 2016 and continued pursuing its capital redeployment and diversification strategy; success and profitability of future investments were not assured.
- Management identified risks including consumer demand, execution of the growth and diversification strategies, currency movements, manufacturing and supplier stability, product liability and warranty exposure, customer financial strength, raw-material availability and the ability to use tax-loss carryforwards.
- The company recorded a $0.5 Q3 discrete tax charge for an uncertain position related to closing its Zhuhai, China manufacturing operations. Nine-month tax expense also included discrete charges totaling $1.1, including the China item and a Swiss withholding-tax charge.
- U.S. federal NOL carryforwards were reported at $166.2 as of December 31, 2015, subject to limitations including potential Section 382 restrictions after a change in control. A substantial valuation allowance remained against deferred tax assets.
- Ordinary-course legal matters could result in losses exceeding accruals, but the company said possible additional losses could not be reasonably estimated and did not expect pending matters, in aggregate, to materially harm its financial condition, results or cash flows.
- The company repurchased 277,656 shares for approximately $1.3 in Q3 under its $30.0 million authorization. The filing reported disclosure controls as effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether gross-margin pressure from U.S. manufacturing transition, foreign exchange and product mix persists or improves.
- The maturity and repayment or refinancing plan for the $21.4 million of debt due primarily in May 2017, and the applicable revolving-credit availability and covenant compliance.
- Cash deployment plans, including potential acquisitions or investments, and whether such deployment produces durable cash flow.
- The recoverability and limitations of tax assets, including the valuation allowance and any potential Section 382 impact.
- The full financial effect of restructuring, the customer bankruptcy-related inventory write-off, and any additional losses from contingencies.