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.

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, 2011.

Recent Accounting Pronouncements

See "Recent Accounting Pronouncements" in Note 1 to the notes to the unaudited condensed consolidated financial statements.

Results of Operations

Consolidated Three Months Ended March 31, 2012 Compared to Consolidated Three Months Ended March 31, 2011

The following presents a discussion of consolidated operations for the three months ended March 31, 2012, compared with the consolidated three months ended March 31, 2011.

                                               THREE MONTHS ENDED
                                       March 31, 2012      March 31, 2011

Sales
Domestic sales                        $         18,815     $        15,830
International sales                             27,604              23,228
Total sales                                     46,419              39,058

Cost of goods sold                              27,803              23,987
Gross profit                                    18,616              15,071

Operating expenses
Selling, general and administrative             13,775              12,329
Restructuring charge                                 -                 774
Transaction costs                                  112                   -

Total operating expenses                        13,887              13,103

Operating income                                 4,729               1,968

Other (expense) income
Interest expense                                  (742 )              (728 )
Interest income                                     12                  10
Other, net                                         290                 418

Total other expense, net                          (440 )              (300 )

Income before income tax                         4,289               1,668
Income tax expense                               1,699                 500
Net income                            $          2,590     $         1,168

Sales

Consolidated sales increased $7,361, or 18.8%, to $46,419 during the three months ended March 31, 2012 compared to consolidated sales of $39,058 during the three months ended March 31, 2011. The increase in sales was attributable to an increase in the quantity and average sales price per unit of new and existing general mountain products sold during the period. There was no meaningful impact on sales due to the movement of foreign currencies against the U.S. dollar.

Consolidated domestic sales increased $2,985, or 18.9%, to $18,815 during the three months ended March 31, 2012 compared to consolidated domestic sales of $15,830 during the three months ended March 31, 2011. The increase in domestic sales was primarily attributable to an increase in the quantity of new and existing general mountain products sold during the period.

Consolidated international sales increased $4,376, or 18.8%, to $27,604 during the three months ended March 31, 2012 compared to consolidated international sales of $23,228 during the three months ended March 31, 2011. The increase in international sales was primarily attributable to an increase in the average sales price per unit of new and existing general mountain products sold during the period. There was no meaningful impact on sales due to the movement of foreign currencies against the U.S. dollar.

Cost of Goods Sold

Consolidated cost of goods sold increased $3,816, or 15.9%, to $27,803 during the three months ended March 31, 2012 compared to consolidated cost of goods sold of $23,987 during the three months ended March 31, 2011. The increase in cost of goods sold was attributable to an increase in sales.

Gross Profit

Consolidated gross profit increased $3,545, or 23.5%, to $18,616 during the three months ended March 31, 2012 compared to consolidated gross profit of $15,071 during the three months ended March 31, 2011. Consolidated gross margin was 40.1% during the three months ended March 31, 2012 compared to a consolidated gross margin of 38.6% during the three months ended March 31, 2011. The increase in gross margin percentage was primarily driven by the mix of product sold and distribution channel in which it was sold and in part to better operating leverage in the business during 2012 compared to 2011.

Selling, General and Administrative

Consolidated selling, general and administrative expenses increased $1,446, or 11.7%, to $13,775 during the three months ended March 31, 2012 compared to consolidated selling, general and administrative expenses of $12,329 during the three months ended March 31, 2011. 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 100% to $0 during the three months ended March 31, 2012 compared to consolidated restructuring expense of $774 during the same period in 2011. The restructuring expenses incurred during the three months ended March 31, 2011 comprised of: (i) $562 related to the relocation of Gregory Mountain Products, Inc. ("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.

Transaction Costs

Consolidated transaction expense increased 100.0% to $112 during the three months ended March 31, 2012 compared to consolidated transaction expense of $0 during the same period in 2011, which consisted primarily of professional fees related to analyzing and evaluating potential acquisition candidates.

Interest Expense

Consolidated interest expense increased $14, or 1.9%, to $742 during the three months ended March 31, 2012 compared to consolidated interest expense of $728 during the three months ended March 31, 2011. The increase in interest expense was primarily attributable to higher average balances outstanding on the Company's line of credit during the three months ended March 31, 2012 compared to the same period in 2011. On February 22, 2012, the Company closed a public offering for 8,913 shares of its common stock, realizing net proceeds of $63,400 before expenses. On February 22, 2012, the Company reduced its outstanding balance on its revolving credit facility with Zions First National Bank to $0, leaving $35,000 of available capacity less outstanding letters of credit.

Income Taxes

Consolidated income tax expense increased $1,199, or 239.8%, to $1,699 during the three months ended March 31, 2012 compared to a consolidated income tax expense of $500 during the same period in 2011. The increase in tax expense due to the increase in pre-tax income and effective income tax rate recorded during the three months ended March 31, 2011.

Our effective income tax rate was 39.6% for the three months ended March 31, 2012 compared to 30.0% for the same period in 2011. 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. There were no discrete events recorded in the Company's effective income tax rate calculation for the three months ended March 31, 2012.

Liquidity and Capital Resources

Consolidated Three Months Ended March 31, 2012 Compared to Consolidated Three Months Ended March 31, 2011

The following presents a discussion of cash flows for the consolidated three months ended March 31, 2012, compared with the consolidated three months ended March 31, 2011. Our primary ongoing funding requirements are for working capital, expansion of our operations and general corporate needs, as well as investing activities associated with targeted, strategic acquisitions and expansion into new product categories. We plan to fund our future expansion of operations and investing activities through a combination of our operating cash flows, revolving credit facility, and equity offerings. We believe that our liquidity requirements for at least the next 12 months will be adequately covered by existing cash, cash provided by operations, and existing revolving credit facility. At March 31, 2012, we had total cash and cash equivalents of $41,644 compared with a cash and cash equivalents balance of $2,400 at December 31, 2011 - which was substantially all in the U.S.

                                                          THREE MONTHS ENDED
                                                  March 31, 2012      March 31, 2011

Net cash provided by operating activities        $            519     $           413
Net cash used in investing activities                      (1,606 )            (1,464 )
Net cash provided by financing activities                  40,279               3,499
Effect of foreign exchange rates on cash                       52                  17
Change in cash and cash equivalents                        39,244               2,465
Cash and cash equivalents, beginning of period              2,400               2,767
Cash and cash equivalents, end of period         $         41,644     $         5,232

Net Cash From Operating Activities

Consolidated net cash provided by operating activities was $519 during the three months ended March 31, 2012 compared to consolidated net cash provided by operating activities of $413 during the three months ended March 31, 2011. The increase in net cash provided operating activities during 2012 is primarily due to increased profitability, which was partially off-set by timing differences of when accounts receivable were collected, inventory purchased, and accounts payable were paid during the three months ended March 31, 2012 compared to the same period in 2011.

Free cash flow, defined as net cash provided by operating activities less capital expenditures, was free cash flows used of $(1,087) during the three months ended March 31, 2012 compared to free cash flows used of $(1,051) during the same period in 2011.

Net Cash From Investing Activities

Consolidated net cash used in investing activities increased by $142 to $1,606 during the three months ended March 31, 2012 compared to consolidated $1,464 during the three months ended March 31, 2011. The increase is due to the increase in consolidated capital expenditures. The increase in capital expenditures is due to certain machinery and equipment and computer hardware and software capital expenditures that were incurred during the three months ended March 31, 2012 that were not incurred during the same period in 2011.

Net Cash From Financing Activities

Consolidated net cash provided by financing activities increased by $36,780 to $40,279 during the three months ended March 31, 2012 compared to consolidated cash provided by financing activities of $3,499 during the three months ended March 31, 2011. The increase is due to the proceeds from the sale of stock and proceeds from exercise of stock options $62,634 and $30, respectively, which was partially off-set by net payments on the line of credit of $(22,385) compared to net borrowings on the line of credit of $3,499 during the same period in 2011. On February 22, 2012, the Company closed a public offering for 8,913 shares of its common stock, realizing net proceeds of $63,400 before expenses. On February 22, 2012, the Company reduced its outstanding balance on its revolving credit facility with Zions First National Bank to $0, leaving $35,000 of available capacity less outstanding letters of credit.

Net Operating Loss

As of December 31, 2011, the Company had net operating loss, research and experimentation credit and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $217,822 ($725 relates to tax windfall, which will not be realized until an income tax payable exists), $1,693 and $261, respectively. The Company believes its U.S. Federal net operating loss ("NOL") will substantially offset its future U.S. Federal income taxes, excluding the amount subject to U.S. Federal Alternative Minimum Tax ("AMT"). AMT is calculated as 20% of AMT income. For purposes of AMT, a maximum of 90% of income is offset by available NOLs. The majority of the Company's pre-tax income is currently earned and expected to be earned in the U.S., or taxed in the U.S. as Subpart F. income and will be offset with the NOL. Of the $217,097 of net operating losses available to offset taxable income, $215,538 does not expire until 2020 or later, subject to compliance with Section 382 of the Internal Revenue Code of 1986, as amended.

As of December 31, 2011, the Company's gross deferred tax asset was $92,251. The Company has recorded a valuation allowance, resulting in a net deferred tax asset of $73,747, excluding deferred tax liabilities. Management has provided a valuation allowance against some of the net deferred income tax assets as of December 31, 2011, because the ultimate realization of those benefits and assets does not meet the more likely than not criteria.

Revolving Credit Facility

The Company and certain of its subsidiaries have a loan agreement with Zions First National Bank, a national banking association ("Lender") (the "Loan Agreement"). Pursuant to the terms of the Loan Agreement, the Lender has made available a $35,000 unsecured revolving credit facility (the "Loan"). The Loan matures on July 2, 2013. The Loan may be prepaid or terminated at the Company's option at anytime without penalty. No amortization is required. Any outstanding principal balance together with any accrued but unpaid interest or fees will be due in full at maturity. The Loan bears interest at the 90-day LIBOR rate plus an applicable margin as determined by the ratio of Senior Net Debt (as calculated in the Loan Agreement) to Trailing Twelve Month EBITDA (as calculated in the Loan Agreement).

Shelf Registration Statements

On February 1, 2011, our shelf registration statement on Form S-3 (File No. 333-171164) (the "Form S-3") filed with the Securities and Exchange Commission was declared effective whereby we may offer, issue and sell from time to time, in one or more offerings and series, together or separately, shares of common stock, shares of preferred stock, debt securities or guarantees of debt securities up to an aggregate amount of $250,000. The proceeds of any offering are anticipated to be used in the strategic development and growth of our business, both organically and through acquisitions.

On February 22, 2012, we consummated the closing of a public offering (the "Offering") of 7,750 shares of the Company's common stock, plus an additional 1,163 shares of common stock to cover an over-allotment option granted to the underwriters, at a price to the public of $7.50 per share (the "Offering Price"). Included in the total number of shares of common stock sold in the Offering were 1,333 shares of common stock purchased at the Offering Price by certain of the Company's officers, directors and employees (the "Reserved Shares"). The Reserved Shares are subject to lock-up agreements restricting the sales of such shares for a period of 90 days, subject to extension under certain circumstances. The underwriters received an underwriting discount of 6%, or $0.45 per share, in connection with the sale of the shares of common stock in the Offering, other than with respect to the sale of the Reserved Shares, for which the underwriters did not receive any underwriting discount. The underwriters exercised the over-allotment option in full at the closing of the Offering. The net proceeds to the Company from the Offering, before expenses, were approximately $63,400. We intend to use the net proceeds from the common stock offered for general corporate purposes, including repayment of debt, capital expenditures and potential acquisitions. The common stock was offered and sold pursuant to a prospectus dated February 1, 2011, a preliminary prospectus supplement filed with the Securities and Exchange Commission on February 15, 2012 and a prospectus supplement filed with the Securities and Exchange Commission on February 17, 2012, in connection with a takedown from the Company's Form S-3 declared effective by the Securities Exchange Commission on February 1, 2011. After the Offering, we may offer, issue and sell, from time to time, in one or more offerings and series, together or separately, shares of our common stock, shares of our preferred stock, debt securities or guarantees of debt securities up to an aggregate amount of $183,156 pursuant to the Form S-3.

On August 19, 2011, our shelf registration statement on Form S-4 (File No. 333-175695) filed with the Securities and Exchange Commission was declared effective whereby we may issue an aggregate of 5,750 shares of common stock, which may be issued from time to time by the Company in connection with acquisitions by the Company of assets, businesses or securities.

Off-Balance Sheet Arrangements

We do not engage in any transactions or have relationships or other arrangements with unconsolidated entities. These include special purpose and similar entities or other off-balance sheet arrangements. We also do not engage in energy, weather or other commodity-based contracts.