Black Diamond, Inc. (formerly Clarus Corporation) — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited fourth-quarter results. Amounts are in millions of dollars unless noted. The issuer name in the filing is Black Diamond, Inc.; it changed its name from Clarus Corporation in 2011.
Business context
Black Diamond designs, manufactures and markets outdoor performance products under Black Diamond, Gregory, POC and PIEPS. It acquired POC in July 2012 and PIEPS in October 2012; results include six months of POC and three months of PIEPS. International markets generated about 58% of annual sales. REI represented approximately 14% of sales.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Sales | $175.9 | $145.8 |
| Gross profit / margin | $67.3 / 38.2% | $56.4 / 38.7% |
| Operating income | $2.2 | $4.9 |
| Net income | $2.0 | $4.9 |
| Diluted EPS | $0.06 | $0.22 |
| Operating cash flow | $(3.4) | $(5.1) |
| Capital expenditures | $5.5 | $2.8 |
| Cash at year-end | $5.1 | $2.4 |
Sales grew 20.6%, reflecting organic growth in climb and mountain products and the acquired businesses. Gross profit rose 19.4%, but gross margin declined 0.5 percentage point. Operating income and net income fell despite higher sales, with increased SG&A, acquisition transaction and integration costs, and purchase-accounting inventory charges contributing. Annual results also included $2.0 million of acquisition transaction costs and $0.2 million of merger and integration costs.
Fourth-quarter sales were $48.8 million versus $36.3 million a year earlier; gross profit was $17.7 million versus $14.2 million. Operating results shifted to a $2.1 million loss from $0.8 million income, while net income was $0.5 million versus $3.5 million. Fourth-quarter gross margin was approximately 36.3%, compared with 39.2% in Q4 2011.
Balance sheet, debt and liquidity
At December 31, 2012, total assets were $320.8 million, current assets $104.5 million and current liabilities $26.2 million (approximately 4.0x current ratio). Total debt carrying value was $40.5 million, including $4.1 million current and $36.4 million long-term; cash was $5.1 million. Operating cash flow remained negative, and free cash flow, as defined by the company, was $(8.9) million.
Investing cash outflow was $55.8 million, primarily reflecting $40.1 million for POC and $10.2 million for PIEPS, net of acquired cash. Financing cash inflow was $62.2 million, mainly from the February 2012 stock offering. The company said existing cash, operating cash flows and its credit facility should cover liquidity needs for at least 12 months.
At year-end, $20.0 million was drawn on a $35.0 million revolving facility. On March 8, 2013, the company refinanced it with a $30.0 million revolver, a $15.0 million term facility and a $10.0 million acquisition facility. The new agreement includes financial and other restrictive covenants, and rates are LIBOR-based. The company also had $16.0 million of 5% subordinated notes due in 2017.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management described growth plans including a technical apparel launch expected in Fall 2013, product-category expansion, international distribution growth and targeted acquisitions.
- Management expects margin improvement over time by leveraging prior infrastructure investment, increasing sales of higher-margin products and bringing some distributors in-house; this is an expectation, not a quantified forecast.
- Key risks include seasonality and weather, discretionary consumer demand, competition, demand forecasting and inventory management, dependence on overseas sourcing, foreign exchange exposure, product liability and customer concentration. REI accounted for about 14% of 2012 sales, with no long-term customer purchase agreements.
- POC and PIEPS acquisitions added $54.7 million of purchase consideration and $18.2 million of goodwill. PIEPS also carries contingent consideration with an estimated fair value of $0.1 million. The company recorded $2.3 million of acquired inventory purchase-accounting costs in cost of sales.
- The company did not recognize $1.0 million of revenue on Gregory inventory shipped to its former Japanese distributor, as it agreed to repurchase that inventory while taking over Japanese distribution.
- Management reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions. The assessment excluded POC and PIEPS, which represented 26% of assets and 12% of sales.
- Routine legal matters were not expected to have a material adverse effect; the filing reported no pending product-liability claims believed to be material. The company does not carry product recall insurance.
Important facts for investors to verify
- Whether acquired POC and PIEPS operations can be integrated and contribute profitably, given lower earnings and acquisition-related costs in 2012.
- Whether sales growth can translate into improved operating margins and positive operating/free cash flow.
- Current borrowing, covenant headroom and the terms and utilization of the March 2013 credit facilities.
- Inventory levels, seasonal demand and exposure to adverse weather, particularly given inventory growth and negative operating cash flow.
- International sales and foreign-currency exposure, including the effects of exchange rates and distributor transitions.
- Potential dilution from equity compensation or future acquisition financing; the 2012 offering materially increased shares outstanding.
- Realizability of tax assets: the company reported $214.2 million of federal NOL carryforwards, subject to limitations including Section 382, and retained a valuation allowance.