Black Diamond, Inc. (formerly Clarus Corporation) — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Amounts below are in U.S. dollars. The company’s principal continuing business was Black Diamond outdoor equipment and apparel, including the PIEPS brand. Gregory and POC are presented as discontinued operations following their sales.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Sales | $155.3 million | $158.3 million |
| Gross profit / margin | $54.2 million / 34.9% | $57.6 million / 36.4% |
| Operating loss | $38.1 million | $10.0 million |
| Loss from continuing operations | $86.5 million | $9.6 million |
| Net income (loss), including discontinued operations | $(76.0) million | $14.0 million |
| Cash from operating activities | $3.7 million | $(28.7) million |
| Free cash flow, as defined by the company | $0.9 million | $(31.6) million |
- Sales declined 1.9%. Domestic sales rose 9.7% to $74.4 million, while international sales fell 10.6% to $80.9 million. Management attributed the overall decline primarily to a $6.0 million adverse foreign-exchange impact and lower international unit sales.
- Operating expenses included a $29.5 million goodwill impairment, $3.4 million of restructuring charges and $0.9 million in transaction costs. SG&A declined 8.6% to $58.5 million, reflecting restructuring savings.
- The $46.1 million income tax expense, despite a pretax continuing-operations loss of $40.4 million, principally reflected a $47.3 million increase in the valuation allowance against deferred tax assets. The company cited the POC sale and a scaled-back apparel initiative as factors reducing the forecasted taxable income supporting realization.
- At year-end, cash was $88.4 million and marketable securities were $9.8 million. Current assets were $182.4 million and current liabilities $21.4 million. Cash from investing activities was $58.4 million, substantially reflecting sale proceeds; financing activities used $4.5 million.
- Long-term debt was $20.1 million, primarily 5% subordinated notes due May 2017. No amount was outstanding on the revolving credit line at December 31, 2015; the company reported a $30 million facility, with a $10 million accordion option.
Fourth-quarter results
Fourth-quarter sales were $44.1 million, compared with $46.0 million in fourth-quarter 2014; gross profit was $14.8 million versus $16.1 million. The quarter recorded a $31.7 million loss from continuing operations and a $20.7 million net loss. The filing identifies a full $29.5 million goodwill impairment for FY2015, recognized in the fourth quarter; quarterly detail does not separately allocate the annual tax valuation-allowance charge.
Material changes, outlook and risks
- Black Diamond sold POC to Dainese in October 2015 for $63.6 million cash consideration; reported net proceeds were $60.7 million after transaction fees and other adjustments. The sale generated an $8.4 million pretax gain. Gregory had been sold in 2014, generating a $39.5 million pretax gain and contributing materially to that year’s reported net income.
- After concluding its strategic-alternatives review, management said it would seek to redeploy significant cash into durable, cash-flow-producing assets, potentially outside the outdoor industry, and potentially monetize its net operating losses. No target, transaction or financial forecast was identified, and management gave no specific earnings or revenue guidance.
- The company reported approximately $166.2 million of U.S. federal NOL carryforwards, subject to limitations and other conditions. It recorded a $62.9 million valuation allowance against deferred tax assets. Use of the NOLs is uncertain and may be restricted by ownership changes or other tax rules.
- Restructuring plans were expected to continue into 2016. The company reported $3.4 million of FY2015 restructuring charges and $0.6 million of related accrued costs at year-end.
- Key risks include seasonality and weather, foreign-currency exposure, reliance on specialty retail and REI (17% of FY2015 sales), third-party manufacturing and sourcing, product liability and recall exposure, competition, and uncertainty in executing the capital redeployment strategy. The company does not maintain product recall insurance.
- On March 11, 2016, after year-end, the lender amended the credit agreement’s minimum-net-worth covenant, reducing the FY2015 threshold from $170 million to $140 million and setting annual increases thereafter. The facility also contains EBITDA, asset-coverage and other restrictive covenants.
- The company did not expect to pay common-stock dividends in the foreseeable future. It repurchased 1.58 million shares for approximately $7.1 million in fourth-quarter 2015 under a $30 million authorization.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Investor verification points
- Review the goodwill impairment assumptions and the basis for the $47.3 million valuation-allowance increase, including the resulting tax-asset recoverability outlook.
- Reconcile POC sale consideration, transaction costs, working-capital adjustments and net cash proceeds across the notes and cash-flow statement.
- Assess covenant compliance and headroom after the March 2016 amendment, as well as the timing and repayment source for the $20.1 million debt due in 2017.
- Track operating cash generation excluding proceeds from divestitures, and evaluate whether restructuring savings offset lower sales and gross margin.
- Monitor the proposed cash redeployment strategy, potential acquisitions, NOL limitations and any resulting changes in the company’s business or risk profile.