Business context and reporting period
This is Black Diamond, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The filing identifies the registrant as Black Diamond, Inc., not Clarus Corp. The company designs, manufactures and markets outdoor performance products under the Black Diamond, Gregory and POC brands. Unless otherwise noted, figures below are in U.S. dollars and millions.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $48.7 | $42.0 | $127.1 | $109.4 |
| Gross profit | $18.5 | $16.0 | $49.5 | $42.1 |
| Gross margin | 37.9% | 38.1% | 39.0% | 38.5% |
| Operating income | $1.5 | $3.0 | $4.3 | $4.0 |
| Net income | $0.7 | $1.0 | $1.4 | $1.4 |
| Diluted EPS | $0.02 | $0.05 | $0.05 | $0.06 |
- Q3 sales rose 15.9%; nine-month sales rose 16.1%. Management attributed growth to POC, stronger sales of new and existing products, and, for the nine-month period, higher average selling prices.
- Q3 operating income declined despite higher sales, reflecting higher SG&A, acquisition-related costs and purchase-accounting inventory costs. Nine-month operating income increased modestly.
- Cash used in operating activities was $8.5 for the nine months, versus $8.9 in 2011. Capital expenditures were $3.6, making reported free cash flow (operating cash flow less capital expenditures) negative $12.1, compared with negative $11.4.
- Investing cash use was $43.7, including $40.1 for POC, net of cash acquired. Financing provided $64.1, principally from the February stock offering. Cash ended September at $14.3, up from $2.4 at December 31, 2011.
- At September 30, total debt was $42.3: $26.0 current and $16.3 long-term. Total assets were $311.1 and stockholders’ equity was $243.7. Current assets were $118.3 against current liabilities of $49.4.
Material changes and unusual items
- POC Sweden AB was acquired July 2 for reported consideration of $44.4, paid with $40.6 cash and 460,000 shares valued at $3.8. The purchase-price allocation was preliminary and included $15.2 of goodwill and $32.0 of identifiable intangible assets.
- The company completed a public offering of 8.913 million shares in February at $7.50 per share, generating approximately $63.4 before expenses. The offering substantially increased the share count.
- POC’s inclusion, foreign-exchange effects and $1.1 of purchase-accounting inventory expense affected reported results. The inventory step-up was expected to be substantially sold in Q4.
- Q3 included $0.4 of transaction costs and $0.1 of merger and integration costs. Nine-month transaction costs were $1.7. Management expected additional acquisition integration expenses in Q4.
- On October 1, after quarter-end, the company acquired PIEPS for approximately $10.3 cash and assumed approximately $2.7 of debt; up to a further $3.0 was contingent on sales targets.
- Gregory agreed to take over Japanese distribution from A&F beginning January 1, 2013, paying $0.75 and purchasing A&F’s then-existing inventory, expected at $0.65–$0.75. The company excluded $0.6 of revenue on inventory shipped to A&F because it was to be repurchased.
Outlook, risks and contingencies
- Management said cash, operating cash flows and the revolving credit facility should cover liquidity needs for at least the next 12 months. It described funding plans for growth and acquisitions as a combination of these sources and potential equity offerings.
- The company reported compliance with debt covenants at September 30. Its $35.0 revolving facility matures July 2, 2013.
- Key stated risks include consumer spending and confidence, acquisition integration and growth, foreign-exchange movements, suppliers and manufacturing stability, raw-material availability and cost, intellectual-property protection, information systems, international-market risks, and use of tax-loss carryforwards.
- Management reported ordinary-course legal matters and no pending product-liability claims it believed would have a material aggregate adverse effect. It cautioned that outcomes could differ as information develops.
- Disclosure controls were assessed as effective. The POC acquisition materially changed internal financial reporting controls; management was reviewing and evaluating the acquired company’s controls.
Important facts for investors to verify
- Confirm the entity and ticker history: this 2012 filing is for Black Diamond, Inc., although the request identifies Clarus Corp.
- Reconcile revolving-debt disclosures: the balance-sheet debt table lists a $25.6 revolving balance, while MD&A states $22.8 outstanding and $12.2 available under the $35.0 facility; the notes also report letters of credit, while MD&A says none were outstanding.
- Track POC and PIEPS integration, acquisition-related costs, preliminary POC purchase accounting and any subsequent adjustments.
- Assess cash conversion and working-capital needs: operating cash flow and free cash flow were negative, with substantial receivables and inventory balances.
- Review dilution from the public offering and acquisition shares, related-party subordinated notes and interest payments, and the contingent PIEPS purchase price.