Black Diamond, Inc. (formerly Clarus Corporation) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The company changed its name from Clarus Corporation to Black Diamond, Inc. in January 2011. It designs and sells outdoor performance products under the Black Diamond and Gregory brands. Unless stated otherwise, amounts below are in millions of dollars; financial statements present amounts in thousands.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 |
|---|---|---|
| Sales | $42.040 | $33.946 |
| Gross profit / margin | $15.997 / 38.1% | $9.535 / 28.1% |
| Operating income (loss) | $2.954 | $(2.402) |
| Net income (loss) | $1.007 | $(3.294) |
| Diluted EPS | $0.05 | $(0.15) |
- Q3 sales rose 23.8%; domestic sales increased 12.9% and international sales 31.6%. Management attributed growth to higher product volumes and, for international sales, favorable currency movements.
- Q3 gross margin was 38.1%, versus 28.1% reported in 2010. The prior-year quarter included a $3.158 million acquisition-accounting inventory step-up; excluding it, prior-year margin was 37.4%. Management attributed the remaining margin improvement to product mix.
- For the nine months, sales were $109.436 million and net income was $1.364 million. The filing’s comparison is not like-for-like: 2011 includes Gregory for the full period, while the 2010 combined comparison includes the predecessor through May 28 and does not include Gregory. Combined 2010 net income of $53.959 million included a $65 million deferred-tax benefit; reported 2010 results are therefore not a straightforward measure of operating trend.
- Nine-month operating cash flow was negative $8.883 million; capital expenditures were $2.487 million, producing management-defined negative free cash flow of $11.370 million. Working-capital use included increases in receivables and inventory.
- At September 30, cash was $1.677 million; current assets were $80.112 million and current liabilities $20.134 million. Total debt was $40.473 million, including $24.948 million outstanding on a $35 million revolving facility and $14.749 million of 5% subordinated notes due 2017. The company reported compliance with debt covenants.
- From December 31, 2010, cash declined from $2.767 million, inventory rose from $34.942 million to $45.178 million, and debt increased from $29.764 million to $40.473 million.
Changes, outlook, and risks
- Q3 SG&A increased 19.1% to $12.824 million, which management linked primarily to strategic initiatives and infrastructure supporting current and anticipated growth. Q3 restructuring expense was $0.219 million, largely related to ending Gregory’s Sacramento office lease. Acquisition merger, integration, and transaction costs were zero in Q3 2011.
- Nine-month restructuring expense was $0.993 million, mainly related to Gregory’s relocation and distribution-facility integration. The filing provides no quantified revenue, earnings, or cash-flow guidance.
- Management identified consumer spending and confidence, customer financial strength, execution and integration of growth plans and acquisitions, suppliers and manufacturing stability, raw-material costs, foreign exchange, intellectual property, international conditions, and use of tax-loss carryforwards as risks. The company uses currency hedges; foreign exchange contract fair values included $0.700 million of assets and $0.742 million of liabilities.
- The company reported ordinary-course legal matters and no pending product-liability claims it believed would have a material adverse effect. It stated that no material risk-factor changes had occurred since its 2010 Form 10-K.
- An immaterial tax-basis correction related to Gregory increased deferred tax assets and reduced goodwill by $2.375 million in prior-period balance sheets. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Assess whether sales growth and gross-margin performance persist, separating volume, currency, product mix, and acquisition effects.
- Track working-capital needs, especially receivables and inventory, and the company’s ability to convert earnings into operating cash flow.
- Monitor revolver utilization, debt-service costs, covenant compliance, and liquidity given the low cash balance and negative operating cash flow.
- Review the 2010 tax benefit and the availability and Section 382 limitations on tax-loss carryforwards when comparing earnings and estimating future taxes.
- Use caution with year-to-date comparisons: the acquisition timing and predecessor accounting make the 2010 and 2011 periods non-comparable.