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BDE > SEC Filings for BDE > Form 10-Q on 6-Aug-2013All Recent SEC Filings

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Form 10-Q for BLACK DIAMOND, INC.


6-Aug-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.

In July 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 June 30, 2013 Compared to Consolidated Three
Months Ended June 30, 2012



The following presents a discussion of consolidated operations for the three
months ended June 30, 2013, compared with the consolidated three months ended
June 30, 2012.



                                              Three Months Ended
                                       June 30, 2013       June 30, 2012

Sales
Domestic sales                        $        15,485     $        15,626
International sales                            23,370              16,289
Total sales                                    38,855              31,915

Cost of goods sold                             23,201              19,449
Gross profit                                   15,654              12,466

Operating expenses
Selling, general and administrative            18,053              13,319
Merger and integration                             83                   -
Transaction costs                                   -               1,138

Total operating expenses                       18,136              14,457

Operating loss                                 (2,482 )            (1,991 )

Other (expense) income
Interest expense, net                            (834 )              (582 )
Other, net                                        303                (195 )

Total other expense, net                         (531 )              (777 )

Loss before income tax                         (3,013 )            (2,768 )
Income tax benefit                               (745 )              (860 )
Net loss                              $        (2,268 )   $        (1,908 )

Sales

Consolidated sales increased $6,940, or 21.7%, to $38,855 during the three months ended June 30, 2013 compared to consolidated sales of $31,915 during the three months ended June 30, 2012. The increase in sales was primarily attributable to the inclusion of POC, an increase in the quantity and average sales price of new and existing mountain products sold during the period, as well as the expected increase 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. We also experienced a decrease in sales of $140 due to the weakening of foreign currencies against the U.S. dollar during the three months ended June 30, 2013.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Consolidated domestic sales decreased $141, or 0.9%, to $15,485 during the three months ended June 30, 2013 compared to consolidated domestic sales of $15,626 during the three months ended June 30, 2012. The decrease in domestic sales was primarily attributable to reduced spring/summer orders resulting from a cool wet spring as well as evolving industry purchasing trends, partially offset by an increase in sales due to the inclusion of POC.

Consolidated international sales increased $7,081, or 43.5%, to $23,370 during the three months ended June 30, 2013 compared to consolidated international sales of $16,289 during the three months ended June 30, 2012. The increase in international sales was primarily attributable to an increase in the quantity and average sales price of new and existing mountain products sold during the period, the inclusion of POC, as well as the expected increase in Gregory's sales in Japan as a result of the transition of the Japanese distribution of Gregory's products from A&F. We also experienced a decrease in sales of $140 due to the weakening of foreign currencies against the U.S. dollar during the three months ended June 30, 2013.

Cost of Goods Sold

Consolidated cost of goods sold increased $3,752, or 19.3%, to $23,201 during the three months ended June 30, 2013 compared to consolidated cost of goods sold of $19,449 during the three months ended June 30, 2012. The increase in cost of goods sold was primarily attributable to an increase in sales both organically and from the inclusion of POC.

Gross Profit

Consolidated gross profit increased $3,188, or 25.6%, to $15,654 during the three months ended June 30, 2013 compared to consolidated gross profit of $12,466 during the three months ended June 30, 2012. Consolidated gross margin was 40.3% during the three months ended June 30, 2013 compared to a consolidated gross margin of 39.1% during the three months ended June 30, 2012. Consolidated gross margin during the three months ended June 30, 2013 increased compared to the prior year due to a favorable mix in higher margin product as a result of the inclusion of POC as well as channel distribution, which was expected due to the transition of the Japanese distribution of Gregory's products from A&F. This was partially offset by a higher level of close-out and promotional activity. The strengthening of the U.S. dollar compared to the Japanese yen also had a negative impact on both sales and gross margin during the three months ended June 30, 2013.

Selling, General and Administrative

Consolidated selling, general, and administrative expenses increased $4,734, or 35.5%, to $18,053 during the three months ended June 30, 2013 compared to consolidated selling, general, and administrative expenses of $13,319 during the three months ended June 30, 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.

Merger and Integration Costs

Consolidated merger and integration expense increased to $83 during the three months ended June 30, 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 100% to $0 during the three months ended June 30, 2013 compared to consolidated transaction expense of $1,138 during the three months ended June 30, 2012, 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.

Interest Expense, net

Consolidated interest expense increased $252, or 43.3%, to $834 during the three months ended June 30, 2013 compared to consolidated interest expense of $582 during the three months ended June 30, 2012. The increase in interest expense was primarily attributable to higher average outstanding debt amounts during the three months ended June 30, 2013 compared to the same period in 2012.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Other, net

Consolidated other, net, increased to income of $303 during the three months ended June 30, 2013 compared to a consolidated other, net expense of $195 during the three months ended June 30, 2012. The increase in other, net, was primarily attributable to the remeasurement gains recognized on the Company's foreign denominated accounts receivable and accounts payable partially off-set by losses on mark-to-market adjustments on non-hedged foreign currency contracts.

Income Taxes

Consolidated income tax benefit decreased $115, or 13.4%, to a benefit of $745 during the three months ended June 30, 2013 compared to consolidated income tax benefit of $860 during the same period in 2012. The decrease in tax benefit is primarily due to the decrease in the effective income tax rate recorded during the three months ended June 30, 2012.

Our effective income tax rate was 24.7% for the three months ended June 30, 2013 compared to 31.1% 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. There were no meaningful discrete events recorded in the Company's effective income tax rate calculation for the three months ended June 30, 2013.

Consolidated Six Months Ended June 30, 2013 Compared to Consolidated Six Months
Ended June 30, 2012



The following presents a discussion of consolidated operations for the six
months ended June 30, 2013, compared with the consolidated six months ended June
30, 2012.



                                               Six Months Ended
                                       June 30, 2013       June 30, 2012

Sales
Domestic sales                        $        35,595     $        34,441
International sales                            54,260              43,893
Total sales                                    89,855              78,334

Cost of goods sold                             54,985              47,252
Gross profit                                   34,870              31,082

Operating expenses
Selling, general and administrative            38,931              27,094
Restructuring charge                              175                   -
Merger and integration                            226                   -
Transaction costs                                  54               1,250

Total operating expenses                       39,386              28,344

Operating (loss) income                        (4,516 )             2,738

Other (expense) income
Interest expense, net                          (1,660 )            (1,312 )
Other, net                                        (92 )                95

Total other expense, net                       (1,752 )            (1,217 )

(Loss) income before income tax                (6,268 )             1,521
Income tax (benefit) expense                     (968 )               839
Net (loss) income                     $        (5,300 )   $           682

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Sales

Consolidated sales increased $11,521, or 14.7%, to $89,855 during the six months ended June 30, 2013 compared to consolidated sales of $78,334 during the six months ended June 30, 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 and mountain products sold during the period, partially off-set by reduced spring/summer orders resulting from an extended late winter season and a cool wet spring as well as evolving industry purchasing trends. We also experienced a decrease in sales of $328 due to the weakening of foreign currencies against the U.S. dollar during the six months ended June 30, 2013.

Consolidated domestic sales increased $1,154, or 3.4%, to $35,595 during the six months ended June 30, 2013 compared to consolidated domestic sales of $34,441 during the six months ended June 30, 2012. The increase in domestic sales was primarily attributable to the inclusion of POC, partially off-set by reduced spring/summer orders resulting from an extended late winter season and a cool wet spring as well as evolving industry purchasing trends.

Consolidated international sales increased $10,367, or 23.6%, to $54,260 during the six months ended June 30, 2013 compared to consolidated international sales of $43,893 during the six months ended June 30, 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 and mountain products sold during the period. We also experienced a decrease in sales of $328 due to the weakening of foreign currencies against the U.S. dollar during the six months ended June 30, 2013.

Cost of Goods Sold

Consolidated cost of goods sold increased $7,733, or 16.4%, to $54,985 during the six months ended June 30, 2013 compared to consolidated cost of goods sold of $47,252 during the six months ended June 30, 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 $3,788 or 12.2%, to $34,870 during the six months ended June 30, 2013 compared to consolidated gross profit of $31,082 during the six months ended June 30, 2012. Consolidated gross margin was 38.8% during the six months ended June 30, 2013 compared to a consolidated gross margin of 39.7% during the six months ended June 30, 2012. Consolidated gross margin during the six months ended June 30, 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. The strengthening of the US dollar compared to the Japanese yen also had a negative impact on both sales and gross margin.

Selling, General and Administrative

Consolidated selling, general, and administrative expenses increased $11,837, or 43.7%, to $38,931 during the six months ended June 30, 2013 compared to consolidated selling, general, and administrative expenses of $27,094 during the six months ended June 30, 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 six months ended June 30, 2013 compared to consolidated restructuring expense of $0 during the same period in 2012. The restructuring expenses incurred during the six months ended June 30, 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 $226 during the six months ended June 30, 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.

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Transaction Costs

Consolidated transaction expense decreased $1,196, or 95.7%, to $54 during the six months ended June 30, 2013 compared to consolidated transaction expense of $1,250 during the six months ended June 30, 2012, 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.

Interest Expense, net

Consolidated interest expense increased $348, or 26.5%, to $1,660 during the six months ended June 30, 2013 compared to consolidated interest expense of $1,312 during the six months ended June 30, 2012. The increase in interest expense was primarily attributable to higher average outstanding debt amounts during the six months ended June 30, 2013 compared to the same period in 2012.

Other, net

Consolidated other, net, decreased to expense of $92 during the six months ended June 30, 2013 compared to a consolidated other, net income of $95 during the six months ended June 30, 2012. The decrease in other, net, was primarily attributable to losses on mark-to-market adjustments on non-hedged foreign currency contracts partially off-set by the remeasurement gains recognized on the Company's foreign denominated accounts receivable and accounts payable.

Income Taxes

Consolidated income tax expense decreased $1,807, or 215.4%, to a benefit of $968 during the six months ended June 30, 2013 compared to consolidated income tax expense of $839 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 six months ended June 30, 2012.

Our effective income tax rate was 15.4% for the six months ended June 30, 2013 compared to 55.2% 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 six months ended June 30, 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 Six Months Ended June 30, 2013 Compared to Consolidated Six Months Ended June 30, 2012

The following presents a discussion of cash flows for the consolidated six months ended June 30, 2013 compared with the consolidated six months ended June 30, 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 June 30, 2013, we had total cash of $2,054 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 June 30, 2013, the Company had $479 of the $2,054 in cash held by foreign entities; however, this cash is available for repatriation without significant tax consequence.

                                                                      Six Months Ended
                                                              June 30, 2013       June 30, 2012

Net cash provided by operating activities                    $         3,629     $         1,669
Net cash used in investing activities                                 (3,276 )            (2,755 )
Net cash (used in) provided by financing activities                   (3,466 )            42,152
Effect of foreign exchange rates on cash                                  56                 (43 )
Change in cash                                                        (3,057 )            41,023
Cash, beginning of period                                              5,111               2,400
Cash, end of period                                          $         2,054     $        43,423

BLACK DIAMOND, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Net Cash From Operating Activities

Consolidated net cash provided by operating activities was $3,629 during the six months ended June 30, 2013 compared to consolidated net cash provided by operating activities of $1,669 during the six months ended June 30, 2012. The increase in net cash provided by operating activities during 2013 is primarily due to improved inventory levels, which was partially off-set by decreased profitability during the six months ended June 30, 2013 compared to the same period in 2012.

Free cash flow, defined as net cash provided by operating activities less capital expenditures, was free cash flow of $1,085 during the six months ended June 30, 2013 compared to free cash flow used of $1,086 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 flow to the comparable GAAP financial measure is set forth below:

                                                     Six Months Ended
                                             June 30, 2013       June 30, 2012

Net cash provided by operating activities   $         3,629     $         1,669
Purchase of property and equipment                   (2,544 )            (2,755 )
Free cash flow                              $         1,085     $        (1,086 )

Net Cash From Investing Activities

Consolidated net cash used in investing activities increased by $521 to $3,276 during the six months ended June 30, 2013 compared to $2,755 during the six months ended June 30, 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 used by financing activities decreased by $45,618 to $3,466 during the six months ended June 30, 2013 compared to consolidated cash provided by financing activities of $42,152 during the six months ended June 30, 2012. The financing activities during the six months ended June 30, 2012 were comprised of: (i) proceeds from the sale of stock and proceeds from the exercise of stock options $62,562 and $447, respectively; and (ii) net payments on the Company's debt line of credit of $20,857. The absence of these activities during . . .

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