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BDE > SEC Filings for BDE > Form 10-Q on 1-Nov-2011All Recent SEC Filings

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Form 10-Q for BLACK DIAMOND, INC.


1-Nov-2011

Quarterly Report


MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting Black Diamond, Inc. ("Black Diamond" or the "Company," which may be referred to as "we," "us," or "our") and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of the Company to differ materially from those expressed or implied by forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, the overall level of consumer spending on our products; general economic conditions and other factors affecting consumer confidence; disruption and volatility in the global capital and credit markets; the financial strength of the Company's customers; the Company's ability to implement its growth strategy; the Company's ability to successfully integrate and grow acquisitions; the Company's ability to maintain the strength and security of its information technology systems; stability of the Company's manufacturing facilities and foreign suppliers; the Company's ability to protect trademarks and other intellectual property rights; fluctuations in the price, availability and quality of raw materials and contracted products; foreign currency fluctuations; our ability to utilize our net operating loss carryforwards; and legal, regulatory, political and economic risks in international markets. More information on potential factors that could affect the Company's financial results is included from time to time in the Company's public reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to the Company as of the date of this Quarterly Report on Form 10-Q, and speak only as the date hereof. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

Overview

Black Diamond is a leader in designing, manufacturing and bringing to market innovative active outdoor performance products for climbing, mountaineering, backpacking, skiing and other active outdoor recreation activities for a wide range of year-round use. Our principal brands include Black Diamond® and GregoryTM, through which we target the demanding requirements of core climbers and skiers, more general outdoor performance enthusiasts and consumers interested in outdoor-inspired gear for their urban activities. Our Black Diamond® and GregoryTM brands are iconic in the active outdoor industry and are linked intrinsically with the modern history of the sports we serve. We believe our brands are synonymous with performance, innovation, durability and safety that the climbing, mountaineering, skiing and backpacking communities rely on and embrace in their active lifestyle.

On May 28, 2010, we acquired Black Diamond Equipment, Ltd. (which may be referred to as "Black Diamond Equipment" or "BDEL") and Gregory Mountain Products, Inc. (which may be referred to as "Gregory" or "GMP") (the "Mergers"). Because the Company had no operations at the time of our acquisition of Black Diamond Equipment, Black Diamond Equipment is considered to be our predecessor company (the "Predecessor") for financial reporting purposes (see Note 2 of our unaudited condensed consolidated financial statements for a more detailed explanation of the acquisition). The Predecessor does not include Gregory.

On January 20, 2011, the Company changed its name from Clarus Corporation to Black Diamond, Inc., which we believe more accurately reflects our current business.

Critical Accounting Policies and Use of Estimates

Management's discussion of financial condition and results of operations is based on the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates and assumptions including those related to derivatives, revenue recognition, income taxes, stock-based compensation, and valuation of long-lived assets, goodwill, and other intangible assets. We base our estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.

There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2010.


BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)

Recent Accounting Pronouncements

On May 12, 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU No. 2011-04 was issued concurrently with International Financial Reporting Standards ("IFRS") 13 Fair Value Measurements, to provide largely identical guidance about fair value measurement and disclosure requirements. The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP. This standard is effective prospectively for interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this standard to have a material effect on the Company's consolidated financial position, results of operations or cash flows.

On June 16, 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or
(2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 (for us this will be our 2012 first quarter), with early adoption permitted. The Company believes the adoption of this update will change the order in which certain financial statements are presented and provide additional detail on those financial statements when applicable, but will not have any other impact on our financial statements.

On September 15, 2011, the FASB issued ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU No. 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity can support the conclusion that it is not more than likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit. Goodwill must be tested for impairment at least annually, and prior to the ASU, a two-step test was required to assess goodwill for impairment. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011 (for us this will be our 2012 first quarter), with early adoption permitted. The Company believes the adoption of this update will change the process in how it performs its annual goodwill impairment test, but will not have any other impact on our financial statements.


BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)

Results of Operations

Consolidated Three Months Ended September 30, 2011 Compared to Consolidated Three Months Ended September 30, 2010

The following presents a discussion of consolidated operations for the three months ended September 30, 2011, compared with the consolidated three months ended September 30, 2010.

                                                   THREE MONTHS ENDED
                                      September 30, 2011       September 30, 2010

Sales
Domestic sales                        $            15,868     $             14,056
International sales                                26,172                   19,890
Total sales                                        42,040                   33,946

Cost of goods sold                                 26,043                   24,411
Gross profit                                       15,997                    9,535

Operating expenses
Selling, general and administrative                12,824                   10,764
Restructuring charge                                  219                      772
Merger and integration                                  -                       88
Transaction costs                                       -                      313

Total operating expenses                           13,043                   11,937

Operating income (loss)                             2,954                   (2,402 )

Other (expense) income
Interest expense                                     (720 )                   (644 )
Interest income                                         5                        6
Other, net                                           (702 )                 (1,586 )

Total other expense, net                           (1,417 )                 (2,224 )

Income (loss) before income tax                     1,537                   (4,626 )
Income tax provision (benefit)                        530                   (1,332 )
Net income (loss)                     $             1,007     $             (3,294 )


BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)

Sales

Consolidated sales increased $8,094, or 23.8%, to $42,040 during the three months ended September 30, 2011 compared to consolidated sales of $33,946 during the three months ended September 30, 2010. The increase in sales was primarily attributable to an increase in the quantity of new and existing products sold during the period of $6,696, as well as an increase in sales of $1,398 due to the strengthening of foreign currencies against the US dollar.

Consolidated domestic sales increased $1,812, or 12.9%, to $15,868 during the three months ended September 30, 2011 compared to consolidated domestic sales of $14,056 during the three months ended September 30, 2010. The increase in domestic sales was primarily attributable to an increase in the quantity of new and existing climbing protection and general mountain products sold during the period.

Consolidated international sales increased $6,282, or 31.6%, to $26,172 during the three months ended September 30, 2011 compared to consolidated international sales of $19,890 during the three months ended September 30, 2010. The increase in international sales was primarily attributable to an increase in the quantity of new and existing climbing protection and general mountain products sold during the period of $4,884, as well as increase in international sales of $1,398 due to the strengthening of foreign currencies against the US dollar.

Cost of Goods Sold

Consolidated cost of goods sold increased $1,632, or 6.7%, to $26,043 during the three months ended September 30, 2011 compared to consolidated cost of goods sold of $24,411 during the three months ended September 30, 2010. The amount recorded during the three months ended September 30, 2010 included an increase in inventory value sold of $3,158 due to the step-up in fair value in purchase accounting; which all inventory acquired, and related step-up in fair value in purchase accounting, was sold in 2010. The increase in cost of goods sold was also attributable to an increase in sales.

Gross Profit

Consolidated gross profit increased $6,462, or 67.8%, to $15,997 during the three months ended September 30, 2011 compared to consolidated gross profit of $9,535 during the three months ended September 30, 2010. Consolidated gross margin was 38.1% during the three months ended September 30, 2011 compared to a consolidated gross margin of 28.1% during the three months ended September 30, 2010. Excluding the $3,158 impact of the acquisition-related fair value adjustment on sold inventory, gross margin for the three month period ending September 30, 2010 would have been 37.4%. The dollar increase in gross profit was primarily attributable to an increase in sales. The increase in gross margin percentage is primarily driven by not being impacted by any acquisition-related fair value adjustments during the three months ended September 30, 2011. When compared to the adjusted gross margin of 37.4%, the current period gross margin percentage increased due to the mix of product sold during 2011 compared to 2010.

Selling, General and Administrative

Consolidated selling, general and administrative expenses increased $2,060, or 19.1%, to $12,824 during the three months ended September 30, 2011 compared to consolidated selling, general and administrative expenses of $10,764 during the three months ended September 30, 2010. The increase in selling, general and administrative expenses was primarily attributable to the Company's investments in its strategic initiatives and infrastructure to support both current and anticipated future growth.

Restructuring Charge

Consolidated restructuring expenses decreased $553, or 71.6%, to $219 during the three months ended September 30, 2011 compared to consolidated restructuring expense of $772 during the same period in 2010. The restructuring expenses incurred during the three months ended September 30, 2011 relate to termination costs of GMP's office lease in Sacramento, CA. The restructuring expenses incurred during the three months ended September 30, 2010 comprised of: (i) $107 related to severance and relocation benefits provided to GMP employees, (ii) $218 related to the release of the Company from its lease obligations and indemnifications by Kanders & Company, Inc. ("Kanders & Company") in connection with the relocation of our corporate office from Stamford, Connecticut to Salt Lake City, Utah, and (iii) $447 relating to the amortization of the $1,061 paid for severance and transition service expenses pursuant to a transition services agreement between the Company and Kanders & Company.


BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)

Merger and Integration

Consolidated merger and integration expenses decreased 100.0% to $0 during the three months ended September 30, 2011 compared to consolidated merger and integration expense of $88 during the same period in 2010, which was attributable to consulting fees related to the acquisitions of BDEL and GMP.

Transaction Costs

Consolidated transaction expense decreased 100.0% to $0 during the three months ended September 30, 2011 compared to consolidated transaction expense of $313 during the same period in 2010, which consisted primarily of professional fees related to the acquisitions of BDEL and GMP.

Interest Expense

Consolidated interest expense increased $76, or 11.8%, to $720 during the three months ended September 30, 2011 compared to consolidated interest expense of $644 during the three months ended September 30, 2010. The increase in interest expense was primarily attributable to higher average balances outstanding on the line of credit during the three months ended September 30, 2011 compared to the same period in 2010.

Income Taxes

Consolidated income tax expense increased $1,862, or 139.8%, to $530 during the three months ended September 30, 2011 compared to a consolidated income tax benefit of $1,332 during the same period in 2010. The increase in tax expense is due primarily to the increase in pre-tax income recorded during the three months ended September 31, 2011.

Our effective income tax rate was 34.5% for the three months ended September 30, 2011 compared to 28.8% for the same period in 2010. Many factors could cause our annual effective tax rate to differ materially from our quarterly effective tax rates, including changes in the geographic mix of taxable income and discrete events that may occur in various quarters.


BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)

Consolidated Nine Months Ended September 30, 2011 Compared to Combined Nine Months Ended September 30, 2010

The following presents a discussion of consolidated operations for the nine months ended September 30, 2011, compared with the combined nine months ended September 30, 2010. The combined nine months ended September 30, 2010 represents the results of the Company for the nine months ended September 30, 2010, and the results of the Predecessor for the period from January 1, 2010 through May 28, 2010, the closing date of the Mergers. The Predecessor does not include GMP.

The Mergers were accounted for in accordance with ASC 805, Business Combinations, resulting in a new basis of accounting from those previously reported by the Predecessor. However, sales and most operating cost items are substantially consistent with those reflected by the Predecessor. Inventories were revalued in accordance with the purchase accounting rules. Depreciation and amortization changed as a result of adjustments to the fair values of property and equipment and amortizable intangible assets due to fair value purchase allocation.

                                   NINE MONTHS             NINE MONTHS          FIVE MONTHS          NINE MONTHS
                                      ENDED                   ENDED                ENDED                ENDED
                                                                                Predecessor
                                  Consolidated                                    Company             Combined
                               September 30, 2011      September 30, 2010      May 28, 2010      September 30, 2010

Sales
Domestic sales                 $            44,670     $            18,092     $      15,751     $            33,843
International sales                         64,766                  23,598            19,192                  42,790
Total sales                                109,436                  41,690            34,943                  76,633

Cost of goods sold                          67,333                  30,347            21,165                  51,512
Gross profit                                42,103                  11,343            13,778                  25,121

Operating expenses
Selling, general and
administrative                              37,084                  18,963            12,138                  31,101
Restructuring charge                           993                   2,149                 -                   2,149
Merger and integration                           -                     868                 -                     868
Transaction costs                                -                   5,075                 -                   5,075

Total operating expenses                    38,077                  27,055            12,138                  39,193

Operating income (loss)                      4,026                 (15,712 )           1,640                 (14,072 )

Other (expense) income
Interest expense                            (2,157 )                  (980 )            (165 )                (1,145 )
Interest income                                 31                      45                 3                      48
Other, net                                     145                  (1,474 )           1,803                     329

Total other (expense)
income, net                                 (1,981 )                (2,409 )           1,641                    (768 )

Income (loss) before income
tax                                          2,045                 (18,121 )           3,281                 (14,840 )
Income tax provision
(benefit)                                      681                 (69,765 )             966                 (68,799 )
Net income                     $             1,364     $            51,644     $       2,315     $            53,959


BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)

Sales

Consolidated sales increased $32,803, or 42.8%, to $109,436 during the nine months ended September 30, 2011 compared to combined sales of $76,633 during the nine months ended September 30, 2010. The increase in sales was primarily attributable to the inclusion of $15,501 in additional sales from GMP during the nine months ended September 30, 2011, an increase in sales of $14,487 by BDEL which was driven by an increase in the quantity of new and existing products sold during the period, as well as an increase in sales of $2,815 due to the strengthening of foreign currencies against the US dollar.

Consolidated domestic sales increased $10,827, or 32.0%, to $44,670 during the nine months ended September 30, 2011 compared to combined domestic sales of $33,843 during the nine months ended September 30, 2010. The increase in domestic sales was primarily attributable to the inclusion of $5,996 additional domestic sales from GMP during the nine months ended September 30, 2011, as well as an increase in domestic sales of $4,831 by BDEL which increase was driven by an increase in the quantity of new and existing climbing protection, general mountain, and ski products sold during the period.

Consolidated international sales increased $21,976, or 51.4%, to $64,766 during the nine months ended September 30, 2011 compared to combined international sales of $42,790 during the nine months ended September 30, 2010. The increase in international sales was primarily attributable to the inclusion of $9,505 additional international sales from GMP for the nine months ended September 30, 2011, an increase in international sales of $9,656 by BDEL which increase was driven by an increase in the quantity of new and existing climbing protection and general mountain products sold during the period, as well as an increase in international sales of $2,815 due to the strengthening of foreign currencies against the US dollar.

Cost of Goods Sold

Consolidated cost of goods sold increased $15,821, or 30.7%, to $67,333 during the nine months ended September 30, 2011 compared to combined cost of goods sold of $51,512 during the nine months ended September 30, 2010. The amount recorded during the nine months ended September 30, 2010 included an increase in inventory value sold of $4,321 due to the step-up in fair value in purchase accounting; which all inventory acquired, and related step-up in fair value in purchase accounting, was sold in 2010. The increase in cost of goods sold was also attributable to an increase in sales by BDEL and from the inclusion of GMP.

Gross Profit

Consolidated gross profit increased $16,982, or 67.6%, to $42,103 during the nine months ended September 30, 2011 compared to combined gross profit of $25,121 during the nine months ended September 30, 2010. Consolidated gross margin was 38.5% during the nine months ended September 30, 2011 compared to a combined gross margin of 32.8% during the nine months ended September 30, 2010. Excluding the $4,321 impact of the acquisition-related fair value adjustment on sold inventory, gross margin for the nine month period ending September 30, 2010 would have been 38.4%. The dollar increase in gross profit was primarily attributable to an increase in sales by BDEL and from the inclusion of GMP. The increase in gross margin percentage is primarily driven by not being impacted by any acquisition-related fair value adjustments during the nine months ended September 30, 2011. When compared to the adjusted gross margin of 38.4%, the current period gross margin is consistent with that of the same period in 2010.

Selling, General and Administrative

Consolidated selling, general and administrative expenses increased $5,983, or 19.2%, to $37,084 during the nine months ended September 30, 2011 compared to combined selling, general and administrative expenses of $31,101 during the nine months ended September 30, 2010. The increase in selling, general and administrative expenses was primarily attributable to the increase in operations with the inclusion of GMP and the Company's investments in its strategic initiatives and infrastructure to support both current and anticipated future growth of $7,403, an increase in depreciation and amortization of $875, off-set by a decrease in non-cash equity compensation expense of $2,295.

Restructuring Charge

Consolidated restructuring expenses decreased $1,156, or 53.8%, to $993 during the nine months ended September 30, 2011 compared to combined restructuring expenses of $2,149 during the same period in 2010. All of the restructuring expense incurred in 2011 and 2010 were attributable to the acquisitions of BDEL and GMP. During 2011, such restructuring expenses comprised of: (i) $781 related to the relocation of GMP to the Company's headquarters, and (ii) $212 related to the disposal of long-lived assets in conjunction with the relocation of the Company's U.S. distribution facilities in Salt Lake City, UT to a new location in Salt Lake City, UT as part of integrating GMP. During 2010, such restructuring expenses comprised of: (i) a total of $1,295 relating to the release of the Company from its lease obligations and indemnifications by Kanders & Company in connection with the relocation of our corporate office from Stamford, Connecticut to Salt Lake City, Utah, (ii) a total of $596 relating to . . .

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