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BDE > SEC Filings for BDE > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for BLACK DIAMOND, INC.

Form 10-Q for BLACK DIAMOND, INC.


6-Nov-2012

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 global leader in designing, manufacturing and marketing innovative active outdoor performance products for climbing, mountaineering, backpacking, skiing, cycling and other outdoor recreation activities for a wide range of year-round use. Our principal brands include Black Diamond®, GregoryTM, POCTM and PIEPSTM through which we target the demanding requirements of core climbers, skiers and cyclers, more general outdoor performance enthusiasts and consumers interested in outdoor-inspired gear for their urban activities. Our Black Diamond®, GregoryTM, POCTM and PIEPSTM 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 outdoor and action sport 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.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED

(in thousands, except per share amounts)

Results of Operations

Consolidated Three Months Ended September 30, 2012 Compared to Consolidated Three Months Ended September 30, 2011

The following presents a discussion of consolidated operations for the three months ended September 30, 2012, compared with the consolidated three months ended September 30, 2011.

                                                   THREE MONTHS ENDED
                                      September 30, 2012       September 30, 2011

Sales
Domestic sales                        $            19,128     $             15,868
International sales                                29,614                   26,172
Total sales                                        48,742                   42,040

Cost of goods sold                                 30,283                   26,043
Gross profit                                       18,459                   15,997

Operating expenses
Selling, general and administrative                16,347                   12,824
Restructuring charge                                   86                      219
Merger and integration                                 76                        -
Transaction costs                                     415                        -

Total operating expenses                           16,924                   13,043

Operating income                                    1,535                    2,954

Other (expense) income
Interest expense                                     (722 )                   (720 )
Interest income                                         9                        5
Other, net                                            521                     (702 )

Total other expense, net                             (192 )                 (1,417 )

Income before income tax                            1,343                    1,537
Income tax expense                                    617                      530
Net income                            $               726     $              1,007

Sales

Consolidated sales increased $6,702, or 15.9%, to $48,742 during the three months ended September 30, 2012 compared to consolidated sales of $42,040 during the three months ended September 30, 2011. The increase in sales was primarily attributable to the inclusion of POC Sweden AB and its subsidiaries (collectively, "POC"). This increase was partially off-set by a decrease in sales of $1,314 due to the weakening of foreign currencies against the U.S. dollar and not recognizing revenue of $604 on inventory shipped to the Company's Gregory Mountain Products, LLC ("Gregory" or "GMP") Japanese distributor, as the inventory will be repurchased in accordance with the terms of the definitive agreement (the "A&F Agreement") entered into on September 28, 2012, by and between Gregory and Kabushiki Kaisha A&F ("A&F").

Consolidated domestic sales increased $3,260, or 20.5%, to $19,128 during the three months ended September 30, 2012 compared to consolidated domestic sales of $15,868 during the three months ended September 30, 2011. The increase in domestic sales was primarily attributable to the inclusion of POC and an increase in the quantity of new and existing climb and mountain products sold during the period.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED

(in thousands, except per share amounts)

Consolidated international sales increased $3,442, or 13.2%, to $29,614 during the three months ended September 30, 2012 compared to consolidated international sales of $26,172 during the three months ended September 30, 2011. The increase in international sales was primarily attributable to the inclusion of POC. This increase was partially off-set by a decrease in sales of $1,314 due to the weakening of foreign currencies against the U.S. dollar and not recognizing revenue of $604 on inventory shipped to the Company's GMP Japanese distributor, as the inventory will be repurchased in accordance with the terms of the A&F Agreement.

Cost of Goods Sold

Consolidated cost of goods sold increased $4,240, or 16.3%, to $30,283 during the three months ended September 30, 2012 compared to consolidated cost of goods sold of $26,043 during the three months ended September 30, 2011. The increase in cost of goods sold was primarily attributable to the inclusion of POC and $1,094 related to the sale of inventory that was recorded at fair value in purchase accounting; the remaining amount of inventory that was recorded at fair value in purchase accounting is expected to be sold during the fourth quarter.

Gross Profit

Consolidated gross profit increased $2,462, or 15.4%, to $18,459 during the three months ended September 30, 2012 compared to consolidated gross profit of $15,997 during the three months ended September 30, 2011. Consolidated gross margin was 37.9% during the three months ended September 30, 2012 compared to a consolidated gross margin of 38.1% during the three months ended September 30, 2011, which gross margins were consistent with one another. Consolidated gross margin during the three months ended September 30, 2012 increased compared to the prior year due to the inclusion of POC; however, it was off-set by a decrease in gross margin of 2.2% due to the sale of inventory that was recorded at fair value in purchase accounting.

Selling, General and Administrative

Consolidated selling, general and administrative expenses increased $3,523, or 27.5%, to $16,347 during the three months ended September 30, 2012 compared to consolidated selling, general and administrative expenses of $12,824 during the three months ended September 30, 2011. The increase in selling, general and administrative expenses was primarily attributable to the inclusion of POC and the Company's investments in its strategic initiatives and infrastructure to support both current and anticipated future growth.

Restructuring Charges

Consolidated restructuring expense decreased $133, or 60.7%, to $86 during the three months ended September 30, 2012 compared to consolidated restructuring expense of $219 during the three months ended September 30, 2011. The restructuring expenses incurred during the three months ended September 30, 2012 relate to severance benefits provided to GMP employees at its Calexico, CA facility and to certain POC employees at its Portsmouth, NH office. The restructuring expenses incurred during the three months ended September 30, 2011 also include termination costs of GMP's office lease in Sacramento, CA.

Merger and Integration Costs

Consolidated merger and integration expense increased to $76 during the three months ended September 30, 2012 compared to consolidated merger and integration expense of $0 during the same period in 2011, which consisted primarily of expenses related to the integration of POC. We expect to incur additional merger and integration expenses in the fourth quarter related to the integration of current acquisitions.

Transaction Costs

Consolidated transaction expense increased to $415 during the three months ended September 30, 2012 compared to consolidated transaction expense of $0 during the same period in 2011, which consisted primarily of professional fees and expenses related to due diligence and the negotiation and documentation of acquisition related agreements in connection with the Company's acquisition of PIEPS Holding GmbH and its subsidiaries (collectively, "PIEPS") on October 1, 2012.

Interest Expense

Consolidated interest expense increased $2, or 0.3%, to $722 during the three months ended September 30, 2012 compared to consolidated interest expense of $720 during the three months ended September 30, 2011, which interest expenses were consistent with one another.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED

(in thousands, except per share amounts)

Other, net

Consolidated other, net increased to income of $521 during the three months ended September 30, 2012 compared to a consolidated other, net expense of $702 during the three months ended September 30, 2011. The increase in other, net was primarily attributable to the remeasurement gains recognized on the Company's foreign denominated accounts receivable and accounts payable and mark-to-market adjustments on non-hedged foreign currency contracts.

Income Taxes

Consolidated income tax expense increased $87, or 16.4%, to $617 during the three months ended September 30, 2012 compared to a consolidated income tax expense of $530 during the same period in 2011. The increase in tax expense is due to the increase in the effective income tax rate recorded during the three months ended September 30, 2012, which is primarily the result of non-deductible transaction costs. During the three months ended September 30, 2012, the Company reversed $530 of the Company's valuation allowance on the Company's deferred tax asset.

Our effective income tax rate was 45.9% for the three months ended September 30, 2012 compared to 34.5% 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 meaningful discrete events recorded in the Company's effective income tax rate calculation for the three months ended September 30, 2012.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED

(in thousands, except per share amounts)

Consolidated Nine Months Ended September 30, 2012 Compared to Consolidated Nine Months Ended September 30, 2011

The following presents a discussion of consolidated operations for the nine months ended September 30, 2012, compared with the consolidated nine months ended September 30, 2011.

                                                    NINE MONTHS ENDED
                                       September 30, 2012       September 30, 2011

Sales
Domestic sales                        $             53,569     $             44,670
International sales                                 73,507                   64,766
Total sales                                        127,076                  109,436

Cost of goods sold                                  77,535                   67,333
Gross profit                                        49,541                   42,103

Operating expenses
Selling, general and administrative                 43,441                   37,084
Restructuring charge                                    86                      993
Merger and integration                                  76                        -
Transaction costs                                    1,665                        -

Total operating expenses                            45,268                   38,077

Operating income                                     4,273                    4,026

Other (expense) income
Interest expense                                    (2,068 )                 (2,157 )
Interest income                                         43                       31
Other, net                                             616                      145

Total other expense, net                            (1,409 )                 (1,981 )

Income before income tax                             2,864                    2,045
Income tax expense                                   1,456                      681
Net income                            $              1,408     $              1,364

Sales

Consolidated sales increased $17,640, or 16.1%, to $127,076 during the nine months ended September 30, 2012 compared to consolidated sales of $109,436 during the nine months ended September 30, 2011. The increase in sales was attributable to an increase in the quantity and average sales price per unit of new and existing climb and mountain products sold during the period and the inclusion of POC. This increase was partially off-set by a decrease in sales of $2,628 due to the weakening of foreign currencies against the U.S. dollar and not recognizing revenue of $604 on inventory shipped to the Company's GMP Japanese distributor during the three months ended September 30, 2012, as the inventory will be repurchased in accordance with the terms of the A&F Agreement.

Consolidated domestic sales increased $8,899, or 19.9%, to $53,569 during the nine months ended September 30, 2012 compared to consolidated domestic sales of $44,670 during the nine months ended September 30, 2011. The increase in domestic sales was primarily attributable to an increase in the quantity of new and existing climb and mountain products sold during the period and the inclusion of POC.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED

(in thousands, except per share amounts)

Consolidated international sales increased $8,741, or 13.5%, to $73,507 during the nine months ended September 30, 2012 compared to consolidated international sales of $64,766 during the nine months ended September 30, 2011. The increase in international sales was primarily attributable to an increase in the quantity and average sales price per unit of new and existing climb and mountain products sold during the period and the inclusion of POC. This increase was partially off-set by a decrease in sales of $2,628 due to the weakening of foreign currencies against the U.S. dollar and not recognizing revenue of $604 on inventory shipped to the Company's GMP Japanese distributor during the three months ended September 30, 2012, as the inventory will be repurchased in accordance with the terms of the A&F Agreement.

Cost of Goods Sold

Consolidated cost of goods sold increased $10,202, or 15.2%, to $77,535 during the nine months ended September 30, 2012 compared to consolidated cost of goods sold of $67,333 during the nine months ended September 30, 2011. The increase in cost of goods sold was primarily attributable to an increase in sales both organically and from the inclusion of POC and $1,094 related to the sale of inventory that was recorded at fair value in purchase accounting; the remaining amount of inventory that was recorded at fair value in purchase accounting is expected to be sold during the fourth quarter.

Gross Profit

Consolidated gross profit increased $7,438, or 17.7%, to $49,541 during the nine months ended September 30, 2012 compared to consolidated gross profit of $42,103 during the nine months ended September 30, 2011. Consolidated gross margin was 39.0% during the nine months ended September 30, 2012 compared to a consolidated gross margin of 38.5% during the nine months ended September 30, 2011. The increase in gross margin percentage is primarily driven by the mix of product sold and distribution channel in which it was sold during 2012 compared to 2011. Consolidated gross margin during the nine months ended September 30, 2012 increased compared to the prior year due to the inclusion of POC; however, it was off-set by a decrease in gross margin of 0.8% due to the sale of inventory that was recorded at fair value in purchase accounting.

Selling, General and Administrative

Consolidated selling, general and administrative expenses increased $6,357, or 17.1%, to $43,441 during the nine months ended September 30, 2012 compared to consolidated selling, general and administrative expenses of $37,084 during the nine months ended September 30, 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 and the inclusion of POC.

Restructuring Charge

Consolidated restructuring expenses decreased $907, or 91.3%, to $86 during the nine months ended September 30, 2012 compared to consolidated restructuring expense of $993 during the nine months ended September 30, 2011. The restructuring expenses incurred during the nine months ended September 30, 2012 relate to severance benefits provided to GMP employees at its Calexico, CA facility and to certain POC employees at its Portsmouth, NH office. The restructuring expenses incurred during the nine months ended September 30, 2011 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.

Merger and Integration Costs

Consolidated merger and integration expense increased to $76 during the nine months ended September 30, 2012 compared to consolidated merger and integration expense of $0 during the same period in 2011, which consisted primarily of expenses related to the integration of POC. We expect to incur additional merger and integration expenses in the fourth quarter related to the integration of current acquisitions.

Transaction Costs

Consolidated transaction expense increased to $1,665 during the nine months ended September 30, 2012 compared to consolidated transaction expense of $0 during the same period in 2011, which consisted primarily of professional fees and expenses related to due diligence and the negotiation and documentation of acquisition related agreements in connection with the Company's acquisition of POC on July 2, 2012 and PIEPS on October 1, 2012.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED

(in thousands, except per share amounts)

Interest Expense

Consolidated interest expense decreased $89, or 4.1%, to $2,068 during the nine months ended September 30, 2012 compared to consolidated interest expense of $2,157 during the nine months ended September 30, 2011. The decrease in interest expense was primarily attributable to lower average balances outstanding on the Company's line of credit during the nine months ended September 30, 2012 compared to the same period in 2011.

Other, net

Consolidated other, net increased to income of $616 during the nine months ended September 30, 2012 compared to consolidated other, net income of $145 during the nine months ended September 30, 2011. The increase in other, net was primarily attributable to the remeasurement gains recognized on the Company's foreign denominated accounts receivable and accounts payable and mark-to-market adjustments on non-hedged foreign currency contracts.

Income Taxes

Consolidated income tax expense increased $775, or 113.8%, to $1,456 during the nine months ended September 30, 2012 compared to a consolidated income tax expense of $681 during the same period in 2011. The increase in tax expense is due to the increase in pre-tax income and the change in the effective income tax rate compared to the nine months ended September 30, 2011, which is primarily the result of non-deductible transaction costs. During the nine months ended September 30, 2012, the Company reversed $530 of the Company's valuation allowance on the Company's deferred tax asset.

Our effective income tax rate was 50.8% for the nine months ended September 30, 2012 compared to 33.3% 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 meaningful discrete events recorded in the Company's effective income tax rate calculation for the nine months ended September 30, 2012.

Liquidity and Capital Resources

Consolidated Nine months ended September 30, 2012 Compared to Consolidated Nine months ended September 30, 2011

The following presents a discussion of cash flows for the consolidated nine months ended September 30, 2012, compared with the consolidated nine months ended September 30, 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 our existing revolving credit facility. At September 30, 2012, we had total cash and cash equivalents of $14,287 compared with a cash and cash equivalents balance of $2,400 at December 31, 2011 - which was substantially all controlled by the Company's U.S. entities.

                                                                           NINE MONTHS ENDED
                                                              September 30, 2012       September 30, 2011

Net cash used in operating activities                        $             (8,492 )   $             (8,883 )
Net cash used in investing activities                                     (43,732 )                 (2,457 )
Net cash provided by financing activities                                  64,149                   10,105
Effect of foreign exchange rates on cash                                      (38 )                    145
Change in cash and cash equivalents                                        11,887                   (1,090 )
Cash and cash equivalents, beginning of period                              2,400                    2,767
Cash and cash equivalents, end of period                     $             14,287     $              1,677

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED

(in thousands, except per share amounts)

Net Cash From Operating Activities

Consolidated net cash used in operating activities was $8,492 during the nine months ended September 30, 2012 compared to consolidated net cash used in operating activities of $8,883 during the nine months ended September 30, 2011. The decrease in net cash used in operating activities during 2012 is primarily due to timing differences of when accounts receivable were collected, inventory purchased, and accounts payable were paid during the nine months ended September 30, 2012 compared to the same period in 2011. Consolidated net cash used during the nine months ended September 30, 2012 was also negatively impacted by the . . .

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