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BDE > SEC Filings for BDE > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for BLACK DIAMOND, INC.


7-May-2013

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

Please note that in this Quarterly Report on Form 10-Q we may use words such as "appears," "anticipates," "believes," "plans," "expects," "intends," "future," and similar expressions which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting the Company 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 exposure to product liability of product warranty claims and other loss contingencies; 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, Inc. (which may be referred to as "Black Diamond," "Company," "we," "our," or "us,") is a global leader in designing, manufacturing, and marketing innovative active outdoor performance products for climbing, mountaineering, backpacking, skiing, cycling, and a wide range of other year round outdoor recreation activities. Our principal brands include Black Diamond®, Gregory™, POC™, and PIEPS™ and are targeted not only to the demanding requirements of core climbers, skiers and cyclists, but also to the more general outdoor performance enthusiasts, and consumers interested in outdoor-inspired gear for their urban activities. Our Black Diamond®, Gregory™, POC™ and PIEPS™ brands are iconic in the active outdoor industry and linked intrinsically with the modern history of the sports we serve. We believe our brands are synonymous with the performance, innovation, durability, and safety that the outdoor and action sports communities rely on and embrace in their active lifestyle.

We offer a broad range of products including: rock-climbing equipment (such as carabiners, protection devices, harnesses, belay devices, helmets, and ice-climbing gear), technical backpacks and high-end day packs, travel luggage, lifestyle packs, tents, trekking poles, headlamps and lanterns, and gloves and mittens. We also offer advanced design helmets, body armor, and goggles for skiing, mountain and road cycling, eyewear, skis, ski poles, ski bindings, ski boots, ski skins, and ski safety products, including avalanche transceivers, shovels, and probes, as well as satellite-based devices for messaging, tracking, and navigation.

In June 2012 we acquired POC Sweden AB and its subsidiaries (collectively, "POC") and in October 2012 we acquired PIEPS Holding GmbH and its subsidiaries (collectively, "PIEPS").

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 the consolidated financial statements requires 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, 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.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

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, 2012.

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, 2013 Compared to Consolidated Three
Months Ended March 31, 2012



The following presents a discussion of consolidated operations for the three
months ended March 31, 2013, compared with the consolidated three months ended
March 31, 2012.



                                               Three Months Ended
                                       March 31, 2013      March 31, 2012

Sales
Domestic sales                        $         20,110     $        18,815
International sales                             30,890              27,604
Total sales                                     51,000              46,419

Cost of goods sold                              31,784              27,803
Gross profit                                    19,216              18,616

Operating expenses
Selling, general and administrative             20,878              13,775
Restructuring charge                               175                   -
Merger and integration                             143                   -
Transaction costs                                   54                 112

Total operating expenses                        21,250              13,887

Operating (loss) income                         (2,034 )             4,729

Other (expense) income
Interest expense, net                             (826 )              (730 )
Other, net                                        (395 )               290

Total other expense, net                        (1,221 )              (440 )

(Loss) income before income tax                 (3,255 )             4,289
Income tax (benefit) expense                      (223 )             1,699
Net (loss) income                     $         (3,032 )   $         2,590

Sales

Consolidated sales increased $4,581, or 9.9%, to $51,000 during the three months ended March 31, 2013 compared to consolidated sales of $46,419 during the three months ended March 31, 2012. The increase in sales was primarily attributable to the inclusion of POC and PIEPS and an increase in the quantity and average sales price of new and existing climb products sold during the period, partially off-set by the expected decline in Gregory's sales in Japan as a result of the transition of the Japanese distribution of Gregory's products from Kabushiki Kaisha A&F ("A&F"), the prior distributor of Gregory's products in Japan, to Gregory, as well as delayed spring/summer orders resulting from an extended late winter season. We also experienced a decrease in sales of $188 due to the weakening of foreign currencies against the U.S. dollar.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Consolidated domestic sales increased $1,295, or 6.9%, to $20,110 during the three months ended March 31, 2013 compared to consolidated domestic sales of $18,815 during the three months ended March 31, 2012. The increase in domestic sales was primarily attributable to the inclusion of POC and an increase in the quantity of new and existing climb products sold during the period, partially off-set by delayed spring/summer orders resulting from an extended late winter season.

Consolidated international sales increased $3,286, or 11.9%, to $30,890 during the three months ended March 31, 2013 compared to consolidated international sales of $27,604 during the three months ended March 31, 2012. The increase in international sales was primarily attributable to the inclusion of POC and PIEPS and an increase in the quantity and average sales price per unit of new and existing climb products sold during the period, partially off-set by the expected decline in Gregory's sales in Japan as a result of the transition of the Japanese distribution of Gregory's products from Kabushiki Kaisha A&F ("A&F"), the prior distributor of Gregory's products in Japan, to Gregory, as well as delayed spring/summer orders resulting from an extended late winter season. We also experienced a decrease in sales of $188 due to the weakening of foreign currencies against the U.S. dollar.

Cost of Goods Sold

Consolidated cost of goods sold increased $3,981, or 14.3%, to $31,784 during the three months ended March 31, 2013 compared to consolidated cost of goods sold of $27,803 during the three months ended March 31, 2012. The increase in cost of goods sold was primarily attributable to an increase in sales both organically and from the inclusion of POC and PIEPS.

Gross Profit

Consolidated gross profit increased $600, or 3.2%, to $19,216 during the three months ended March 31, 2013 compared to consolidated gross profit of $18,616 during the three months ended March 31, 2012. Consolidated gross margin was 37.7% during the three months ended March 31, 2013 compared to a consolidated gross margin of 40.1% during the three months ended March 31, 2012. Consolidated gross margin during the three months ended March 31, 2013 decreased compared to the prior year due to an unfavorable product mix in lower margin products and a higher level of close-out and promotional activity on winter seasonal inventory as a result of the slow start to the 2012/2013 winter season. The strengthening of the U.S. dollar compared to the Japanese Yen also had a negative input on both sales and gross margin.

Selling, General and Administrative

Consolidated selling, general, and administrative expenses increased $7,103, or 51.6%, to $20,878 during the three months ended March 31, 2013 compared to consolidated selling, general, and administrative expenses of $13,775 during the three months ended March 31, 2012. The increase in selling, general, and administrative expenses was primarily attributable to the inclusion of POC, PIEPS, Black Diamond Japan GK, and the Company's investments in its strategic initiatives, such as apparel, and infrastructure to support both current and anticipated future growth.

Restructuring Charges

Consolidated restructuring expense increased to $175 during the three months ended March 31, 2013 compared to consolidated restructuring expense of $0 during the same period in 2012. The restructuring expenses incurred during the three months ended March 31, 2013 relate to the relocation of POC's Portsmouth, NH facility to the Company's U.S. distribution facilities in Salt Lake City, UT.

Merger and Integration Costs

Consolidated merger and integration expense increased to $143 during the three months ended March 31, 2013 compared to consolidated merger and integration expense of $0 during the same period in 2012, which consisted of expenses related to the integration of POC and PIEPS. We expect to incur additional merger and integration expenses throughout the year related to our ongoing integration of POC and PIEPS.

Transaction Costs

Consolidated transaction expense decreased $58, or 51.8%, to $54 during the three months ended March 31, 2013 compared to consolidated transaction expense of $112 during the three months ended March 31, 2012, which primarily consisted of professional accounting fees related to the Company's acquisitions of POC and PIEPS.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Interest Expense, net

Consolidated interest expense increased $96, or 13.2%, to $826 during the three months ended March 31, 2013 compared to consolidated interest expense of $730 during the three months ended March 31, 2012. The increase in interest expense was primarily attributable to debt amounts assumed in connection with the Company's acquisition of POC and PIEPS.

Other, net

Consolidated other, net, decreased to expense of $395 during the three months ended March 31, 2013 compared to a consolidated other, net income of $290 during the three months ended March 31, 2012. The decrease in other, net, was primarily attributable to the remeasurement losses recognized on the Company's foreign denominated accounts receivable and accounts payable partially off-set by gains on mark-to-market adjustments on non-hedged foreign currency contracts.

Income Taxes

Consolidated income tax expense decreased $1,922, or 113.1%, to a benefit of $223 during the three months ended March 31, 2013 compared to a consolidated income tax expense of $1,699 during the same period in 2012. The decrease in tax expense is due to the decrease in pre-tax income and effective income tax rate recorded during the three months ended March 31, 2012.

Our effective income tax rate was 6.9% for the three months ended March 31, 2013 compared to 39.6% for the same period in 2012. Factors that could cause our annual effective tax rate to differ materially from our quarterly effective tax rates include changes in the geographic mix of taxable income and discrete events that may occur in various quarters. During the three months ended March 31, 2013, a benefit of $230 was recorded as a discrete event for the 2012 federal research credit that was retroactively reinstated in 2013.

Liquidity and Capital Resources

Consolidated Three months ended March 31, 2013 Compared to Consolidated Three months ended March 31, 2012

The following presents a discussion of cash flows for the consolidated three months ended March 31, 2013 compared with the consolidated three months ended March 31, 2012. 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 March 31, 2013, we had total cash of $4,127 compared with a cash balance of $5,111 at December 31, 2012, which was substantially all controlled by the Company's U.S. entities. At March 31, 2013 the Company had $1,059 of the $4,127 in cash held by foreign entities; however, this cash is available for repatriation without significant tax consequence.

                                                     Three Months Ended
                                             March 31, 2013      March 31, 2012

Net cash provided by operating activities   $              2     $           519
Net cash used in investing activities                 (1,889 )            (1,606 )
Net cash provided by financing activities                648              40,279
Effect of foreign exchange rates on cash                 255                  52
Change in cash                                          (984 )            39,244
Cash, beginning of period                              5,111               2,400
Cash, end of period                         $          4,127     $        41,644

Net Cash From Operating Activities

Consolidated net cash provided by operating activities was $2 during the three months ended March 31, 2013 compared to consolidated net cash provided by operating activities of $519 during the three months ended March 31, 2012. The decrease in net cash provided by operating activities during 2013 is primarily due to decreased 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, 2013 compared to the same period in 2012.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Free cash flow, defined as net cash provided by operating activities less capital expenditures, was free cash flows used of $1,137 during the three months ended March 31, 2013 compared to free cash flows used of $1,087 during the same period in 2012. The Company believes that the non-GAAP measure, free cash flow, provides an understanding of the capital required by the Company to expand its asset base. A reconciliation of free cash flows to comparable GAAP financial measures is set forth below:

                                                     Three Months Ended
                                             March 31, 2013      March 31, 2012

Net cash provided by operating activities   $              2     $           519
Purchase of property and equipment                    (1,139 )            (1,606 )
Free cash flow                              $         (1,137 )   $        (1,087 )

Net Cash From Investing Activities

Consolidated net cash used in investing activities increased by $283 to $1,889 during the three months ended March 31, 2013 compared to $1,606 during the three months ended March 31, 2012. The increase is a result of the Company's acquisition of Gregory's Japanese distribution assets from A&F, the prior distributor of Gregory's products in Japan, for $750, partially offset by a decrease in capital expenditures.

Net Cash From Financing Activities

Consolidated net cash provided by financing activities decreased by $39,631 to $648 during the three months ended March 31, 2013 compared to consolidated cash provided by financing activities of $40,279 during the three months ended March 31, 2012. The financing activities during the three months ended March 31, 2012 were comprised of: (i) proceeds from the sale of stock and proceeds from the exercise of stock options $62,634 and $30, respectively, and (ii) net payments on the Company's debt line of credit of $22,385. The absence of these activities during the three months ended March 31, 2013 generated a decrease in net cash provided by financing compared to the three months ended March 31, 2012.

Net Operating Loss

As of December 31, 2012, the Company had net operating loss, research and experimentation credit, and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $214,195 ($1,853 relates to tax windfall, which will not be realized until an income tax payable exists), $1,640 and $291, 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. The $212,342 of net operating losses available to offset taxable income 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, 2012, the Company's gross deferred tax asset was $91,976. The Company has recorded a valuation allowance, resulting in a net deferred tax asset of $74,366, excluding deferred tax liabilities. Management has provided a valuation allowance against some of the net deferred income tax assets as of December 31, 2012, because the ultimate realization of those benefits and assets does not meet the more likely than not criteria.

Revolving Credit Facility

On March 8, 2013, the Company together with its direct and indirect domestic subsidiaries entered into an amended and restated loan agreement (the "Loan Agreement") with Zions First National Bank to refinance the line of credit with a new maturity date of March 8, 2016. Under the Loan Agreement, the Company has a $30,000 Revolving Line of Credit for funding general corporate needs. In addition to the Revolving Line of Credit, the Company obtained a Term Facility and Acquisition Facility from the Lender. Under the Term Facility, the Lender has made available $15,000 for funding permanent working capital, of which $10,000 was used upon the close of the Loan Agreement to reduce amounts owed on the already existing revolving credit facility. The remaining $5,000 is available to fund existing term debt of foreign subsidiaries or to reduce the Revolving Line of Credit Facility. The term loan is due and payable in monthly payments of principal and interest based on a 10 year amortization from the closing date and is adjusted monthly based on new advances. Advances under the Term Facility are available through March 8, 2016, with the all principal and interest due March 8, 2023. The Acquisition Facility allows the Company to borrow up to $10,000 to fund permitted acquisitions. Advances less than $1,000 will not be permitted and only interest will be payable monthly for 12 months following each advance. Subsequent to 12 months of each advance, monthly payments of interest and principal will be made based on a five year amortization. Advances under the Acquisition Facility are available through March 8, 2016, with all principal and interest due six years from the date of each advance, but no later than March 8, 2021. Interest on all facilities is based on the one-month LIBOR rate plus an applicable margin as determined by the ratio of Total Senior Debt (as calculated in the Loan Agreement) to Trailing Twelve Month EBITDA (as calculated in the Loan Agreement). As of March 31, 2013, the Company had drawn down $13,374, $10,000, and $0 on the Revolving Line of Credit, Term Facility, and Acquisition Facility, respectively. As of March 31, 2013, the Company had the availability to draw on $16,626, $5,000, and $10,000 on the Revolving Line of Credit, Term Facility, and Acquisition Facility, respectively.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

5% Senior Subordinated Notes due May 28, 2017

As part of the consideration payable to the Stockholders of GMP when the Company acquired GMP, the Company issued $14,517, $7,539, and $554 in 5% seven year subordinated promissory notes due May 28, 2017 (the "Merger Consideration Subordinated Notes") to Kanders GMP Holdings, LLC, Schiller Gregory Investment Company, LLC, and five former employees of Gregory Mountain Products, respectively. Mr. Warren B. Kanders, the Company's Executive Chairman and a member of its Board of Directors, is a majority member and a trustee of the manager of Kanders GMP Holdings, LLC. The sole manager of Schiller Gregory Investment Company, LLC is Mr. Robert R. Schiller, the Company's Executive Vice Chairman and a member of its Board of Directors. The principle terms of the Merger Consideration Subordinated Notes are as follows: (i) the principal amount is due and payable on May 28, 2017 and is prepayable by the Company at anytime;
(ii) interest will accrue on the principal amount at the rate of 5% per annum and shall be payable quarterly in cash; (iii) the default interest rate shall accrue at the rate of 10% per annum during the occurrence of an event of default; and (iv) events of default, which can only be triggered with the consent of Kanders GMP Holdings, LLC, are: (a) the default by the Company on any payment due under a Merger Consideration Subordinated Note; (b) the Company's failure to perform or observe any other material covenant or agreement contained in the Merger Consideration Subordinated Notes; or (c) the Company's instituting or becoming subject to a proceeding under the Bankruptcy Code. The Merger Consideration Subordinated Notes are junior to all senior indebtedness of the Company, except that payments of interest continue to be made under the Merger Consideration Subordinated Notes as long as no event of default exists under any senior indebtedness. Additionally, an uncured event of default under the Merger Consideration Subordinated Notes may result in an event of default under the Loan Agreement discussed above.

Given the below market interest rate for comparably secured notes and the relative illiquidity of the notes, we have discounted the notes to $8,640, $4,487, and $316, respectively, at the date of acquisition. We are accreting the discount on the notes to interest expense using the effective interest method over the term of the notes.

On April 7, 2011, Schiller Gregory Investment Company, LLC transferred its Merger Consideration Subordinated Note in equal amounts to the Robert R. Schiller Cornerstone Trust and the Deborah Schiller 2005 Revocable Trust. During the three months ended March 31, 2013, $181 in interest was paid to Kanders GMP Holdings, LLC, and $94 in interest was paid to the Robert R. Schiller Cornerstone Trust and the Deborah Schiller 2005 Revocable Trust pursuant to the outstanding Merger Consideration Subordinated Notes.

On May 29, 2012 and August 13, 2012, five former employees of Gregory Mountain Products exercised certain sales rights and sold the Company's outstanding 5% Unsecured Subordinated Notes due May 28, 2017 held by them (the "Gregory Subordinated Notes") in the aggregate principal amount of approximately $365 to Kanders GMP Holdings, LLC and in the aggregate principal amount of approximately $189 to Schiller Gregory Investment Company, LLC. The principal amounts due under the outstanding Gregory Subordinated Notes are due and payable on May 28, 2017 and are prepayable by the Company at anytime. Interest accrues on the principal amount of the outstanding Gregory Subordinated Notes at the rate of 5% per annum and are payable quarterly in cash. During the three months ended March 31, 2013, $5 in interest was paid to Kanders GMP Holdings, LLC, and $3 in interest was paid to Schiller Gregory Investment Company, LLC.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

. . .

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