CLAR

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2011, for Black Diamond, Inc. (formerly Clarus Corp., renamed January 20, 2011). The company is a leading provider of outdoor recreation equipment and active lifestyle products, operating under the principal brands Black Diamond and Gregory. The reporting period reflects the consolidated results following the May 2010 acquisitions of Black Diamond Equipment, Ltd. and Gregory Mountain Products, Inc.

Key Financial Metrics

Note: All figures in thousands except per share amounts. Q1 2010 figures represent the combined results of the Company and the Predecessor (Black Diamond Equipment) prior to the Gregory acquisition.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 65.1% to $39.1 million, driven by the inclusion of Gregory Mountain Products ($10.4 million) and organic growth in Black Diamond Equipment ($5.0 million).
• Profitability: The company returned to profitability with $1.2 million in net income, compared to a $0.96 million net loss in the prior period. Operating income improved from a loss of $0.57 million to $1.97 million.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose 50.7% to $12.3 million due to the inclusion of Gregory operations and increased non-cash equity compensation. A one-time restructuring charge of $0.77 million was recorded for facility relocations.
• Interest Expense: Interest expense surged 586.8% to $0.73 million, attributable to new debt incurred to finance the 2010 acquisitions.
• Cash Flow: Net cash provided by operating activities decreased to $0.41 million from $4.75 million, primarily due to timing differences in accounts receivable collections and payables. Free cash flow turned negative at $(1.05) million due to increased capital expenditures ($1.46 million) for building renovations and tooling.

Outlook, Risks, and Management Commentary

• Management Commentary: Management attributes the sales increase to the successful integration of Gregory and strong volume growth in climbing protection and ski products. The company remains compliant with all debt covenants, including EBITDA and tangible net worth requirements.
• Debt Structure: The company maintains a $35 million unsecured revolving credit facility maturing in July 2013. As of March 31, 2011, $18.3 million was drawn on the revolver, alongside $14.3 million in 5% Senior Subordinated Notes due 2017.
• Tax Position: The company holds significant Net Operating Loss (NOL) carryforwards of approximately $226.8 million, subject to Section 382 limitations. The effective tax rate for the quarter was 30.0%.
• Risks: Key risks include consumer spending levels, global economic conditions, foreign currency fluctuations (hedged via forward contracts), and the ability to successfully integrate acquisitions. The company faces standard product liability risks inherent to consumer goods manufacturing.
• Unusual Items: The $0.77 million restructuring charge and the absence of transaction costs (which were $1.5 million in Q1 2010 for a terminated deal) are notable non-recurring items affecting comparability.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the EBITDA-based covenants in the revolving credit facility and senior notes.
• Working Capital Trends: Monitor the increase in accounts receivable ($24.5 million) and the timing of collections to ensure cash flow stability.
• Integration Progress: Assess the realization of synergies from the Gregory and Black Diamond Equipment mergers, specifically regarding the $0.77 million restructuring costs.
• Capital Expenditures: Review the sustainability of the $1.46 million in Q1 capital expenditures and their impact on future free cash flow.
• Foreign Exchange Exposure: Evaluate the effectiveness of the currency hedging program given the significant portion of international sales (59.5% of total).