Business context and reporting period
This is Black Diamond, Inc.’s Form 10-K for the fiscal year ended December 31, 2011. Clarus Corporation changed its name to Black Diamond in January 2011. The company designs, manufactures and sells outdoor equipment under the Black Diamond and Gregory brands. Its May 2010 acquisitions of Black Diamond Equipment and Gregory make period comparisons imperfect: the 2011 results include both businesses for the full year, while the company’s MD&A comparison combines 2010 company results with predecessor results before the acquisitions closed.
Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise. The filing also reports fourth-quarter results, but this is an annual report, not a standalone quarterly filing.
Financial performance and condition
| Metric | FY 2011 | Comparable FY 2010 |
|---|---|---|
| Net sales | $145.8 million | $110.9 million combined |
| Gross profit / margin | $56.4 million / 38.7% | $37.5 million / 33.8% reported; 38.3% excluding acquisition inventory step-up |
| Operating income (loss) | $4.9 million | $(14.7) million combined |
| Net income | $4.9 million | $53.5 million combined |
| Diluted earnings per share | $0.22 | $2.56 reported |
| Cash from operating activities | $(5.1) million | $(6.3) million combined |
- Sales grew 31.5% versus the combined 2010 comparison. The increase reflected a full year of Gregory, organic growth at Black Diamond Equipment, and approximately $2.9 million of favorable foreign-exchange impact.
- Annual operating results improved as merger-related transaction and integration costs fell to zero; 2011 still included $1.0 million of restructuring costs. The reported 2010 net income was unusually high because of a $65 million deferred-tax valuation-allowance reversal. The 2011 tax benefit was $2.7 million, including a $3.0 million valuation-allowance reversal.
- Fourth-quarter 2011 sales were $36.3 million, gross profit $14.2 million, operating income $0.8 million and net income $3.5 million. Fourth-quarter 2011 net income included a $3.0 million tax valuation-allowance benefit.
- Free cash flow, defined by the company as operating cash flow less capital expenditures, was negative $7.9 million; capital expenditures were $2.8 million. Inventory rose to $47.1 million from $34.9 million, contributing to cash use.
- At year-end, cash was $2.4 million, current assets $77.0 million, current liabilities $17.0 million and total assets $227.7 million. The current-asset balance includes $47.1 million of inventory.
- Debt carrying value was approximately $38.1 million, comprising $22.4 million drawn on a $35 million revolving facility, $15.0 million of 5% subordinated notes, and smaller obligations. The revolver matures July 2013; the subordinated notes are due in 2017. Interest expense was $2.9 million, up from $1.9 million combined in 2010.
Material changes versus the prior comparable period
- International sales increased 33.5% to $83.0 million and represented approximately 57% of 2011 sales; domestic sales increased 28.9% to $62.8 million.
- Gross margin was 38.7%, versus 33.8% in 2010 as reported. The comparison is affected by a $5.0 million acquisition-related inventory fair-value step-up charged to 2010 cost of sales; on an adjusted basis, the filing gives 2010 gross margin as 38.3%.
- Selling, general and administrative expense rose to $50.5 million from $43.3 million, primarily reflecting Gregory, strategic and infrastructure investment, and increased depreciation and amortization; lower non-cash equity compensation partly offset the increase.
- Cash used in operations improved from $6.3 million to $5.1 million, but remained negative. Cash used in investing fell substantially as 2010 included the acquisitions.
- Year-end long-term debt increased from $29.8 million to $38.1 million, while cash declined from $2.8 million to $2.4 million.
Outlook, management commentary, risks and unusual items
- The filing provides no formal quantified revenue or earnings guidance. Management describes plans to grow existing accounts, develop new products, expand distribution internationally, pursue selected acquisitions and improve margins by leveraging infrastructure and shifting mix toward higher-margin products.
- Management planned a technical apparel launch as early as fall 2013 and identified apparel as a significant growth opportunity; it also described footwear as a possible future category. These initiatives require investment and the company acknowledged limited experience in apparel.
- Management stated that existing cash, operating cash flow and the revolving facility should cover liquidity needs for at least 12 months. However, 2011 operating cash flow and free cash flow were negative, working capital needs are seasonal, and the credit facility is subject to financial and restrictive covenants.
- On March 2, 2012, the company amended its credit agreement’s covenants, including adding a fixed-charge coverage ratio and changing net-worth requirements. On February 22, 2012, it completed a public offering of approximately 8.9 million shares at $7.50 per share, generating approximately $63.4 million of net proceeds before expenses; intended uses include debt repayment, capital expenditures and potential acquisitions. These post-year-end events affect liquidity and share count.
- Principal risks include discretionary consumer demand and economic weakness; weather-driven seasonality; customer concentration (REI was about 15% of sales and A&F Japan about 6%); competition and product acceptance; reliance on foreign suppliers and manufacturing; currency and raw-material volatility; product safety, liability and recall exposure (the company stated it has no product-recall insurance); acquisition integration and growth execution; and debt covenant compliance.
- The company reported no pending product-liability claims it believed would materially affect its financial position, results or cash flows. It said ordinary-course litigation was not expected to have a material adverse effect. Environmental compliance costs were not considered material, though future obligations cannot be ruled out.
- Goodwill and indefinite-lived intangibles were not impaired in the annual tests. The filing identifies a $2.375 million correction to the tax basis of certain acquired Gregory assets, which management deemed immaterial to previously reported periods.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at December 31, 2011.
Important facts for investors to verify
- Use the combined 2010 comparison for operating trends and separate the $65 million 2010 tax benefit from recurring earnings; assess 2011 earnings apart from its $3 million tax benefit.
- Review the full cash-flow and working-capital picture, particularly inventory growth, negative operating cash flow and seasonal borrowing needs.
- Confirm debt covenant headroom, revolver availability and the effects of the March 2012 covenant amendment; assess debt repayment and liquidity after the share offering.
- Assess dilution and capital allocation following the approximately 8.9 million-share offering, including use of proceeds and any future acquisition-related share issuance.
- Monitor customer concentration, product safety and recall exposure, supplier dependence, foreign-exchange risks and the execution, cost and timing of the apparel initiative.