Black Diamond, Inc. (formerly Clarus Corporation) — Q2 2011 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2011; financial amounts below are in millions of dollars unless noted. The company sells outdoor recreation equipment under the Black Diamond and Gregory brands. It changed its name from Clarus Corporation to Black Diamond, Inc. in January 2011 after acquiring Black Diamond Equipment and Gregory in May 2010.
Comparisons use management’s combined 2010 results where available, combining the registrant and predecessor periods. The acquisition created a new accounting basis, and Gregory was not included in the predecessor figures. Accordingly, comparisons are not fully like-for-like.
Financial performance and position
| Metric | Q2 2011 | Comparable Q2 2010 | Six months 2011 | Comparable six months 2010 |
|---|---|---|---|---|
| Sales | $28.338 | $19.030 | $67.396 | $42.687 |
| Gross profit / margin | $11.035 / 38.9% | $6.466 / 34.0%; 40.3% excluding inventory step-up | $26.106 / 38.7% | $15.586 / 36.5%; 39.3% excluding inventory step-up |
| Operating income (loss) | $(0.896) | $(11.098) | $1.072 | $(11.670) |
| Net income (loss) | $(0.811) | $58.208 | $0.357 | $57.253 |
| EPS | $(0.04) | Not stated for combined period | $0.02 | Not stated for combined period |
Sales grew 48.9% in Q2 and 57.9% in the first half. Management attributed growth to Gregory’s inclusion, higher Black Diamond Equipment sales from product volumes, and favorable currency movements. International sales were $15.366 million in Q2 and $38.594 million for the half.
At June 30, cash was $1.655 million, down from $2.767 million at year-end 2010. Current assets were $68.282 million and current liabilities $20.654 million. Inventory increased to $44.483 million from $34.942 million. Total assets were $218.223 million; total liabilities were $52.220 million.
Six-month operating cash flow was only $0.008 million; capital expenditures were $2.125 million, and company-defined free cash flow was negative $2.117 million. Cash declined $1.112 million during the half.
Total debt was $30.961 million, including $15.480 million drawn on a $35 million revolving facility, $14.525 million of 5% subordinated notes due 2017, and other debt. The revolver matures July 2, 2013. The company reported compliance with its debt covenants at June 30.
Material changes and unusual items
- Q2 gross profit rose 70.7%, faster than sales, but gross margin was below the 2010 adjusted comparison; management cited 2011 product mix. The 2010 reported margin was affected by a $1.2 million acquisition-related inventory fair-value step-up.
- Q2 SG&A was $11.931 million, down 1.8% from the combined comparison, reflecting lower non-cash equity compensation partly offset by higher operating costs. First-half SG&A increased 19.3% to $24.260 million.
- First-half restructuring costs were $0.774 million, mainly for Gregory’s relocation and distribution-facility changes. No Q2 restructuring, merger/integration, or transaction costs were recorded; those acquisition-related costs burdened the 2010 comparison.
- Interest expense increased to $0.709 million in Q2 and $1.437 million for the half, primarily due to acquisition financing.
- The 2010 comparison includes a large income-tax benefit—$68.051 million for the combined Q2 comparison—principally from recognition of a $65 million deferred tax asset. This makes the 2010 net income comparison unrepresentative of underlying operating performance.
- Foreign-exchange contracts are used to hedge anticipated sales. At June 30, derivative assets were $0.625 million and liabilities $1.575 million; the accumulated derivative loss was $0.672 million.
Outlook, risks, and contingencies
The filing provides no specific revenue, earnings, or cash-flow guidance. Management says interim results are not necessarily indicative of full-year results. The company identifies risks including consumer demand and economic conditions, acquisition integration and growth, manufacturing and supplier stability, raw-material costs, foreign-exchange movements, intellectual-property protection, international-market risks, and use of tax-loss carryforwards.
The company reported $225.786 million of federal NOLs available after Section 382 limitations, subject to applicable restrictions and expiration dates. Ordinary-course legal matters were not believed likely to have a material adverse effect based on information then available; the company also disclosed general product-liability exposure but no pending product-liability claims believed to be material.
A $250 million shelf registration allows potential future securities offerings; a separate shelf permits up to 5.75 million shares for acquisitions. These are authorizations, not reported completed financings. Management stated disclosure controls were effective and reported no material change in internal control during the quarter.
Important facts for investors to verify
- How much of reported sales growth reflects organic volume versus Gregory’s inclusion and currency translation.
- Whether margins recover from the 2011 product mix and whether inventory growth converts into sales and cash.
- Liquidity and cash generation, given minimal operating cash flow, negative free cash flow, and low cash balances.
- Debt-service capacity, revolver availability, and continued compliance with covenant requirements.
- The assumptions and restrictions behind deferred tax assets and NOL utilization, and any future use of shelf registrations.
- Comparability of 2011 results with 2010, given the acquisition accounting basis and the unusually large 2010 tax benefit.