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BDE > SEC Filings for BDE > Form 10-K on 4-Mar-2014All Recent SEC Filings

Show all filings for BLACK DIAMOND, INC.

Form 10-K for BLACK DIAMOND, INC.


4-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Please note that in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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, including its ability to organically grow each of its historical product lines, its new apparel line and its recently acquired businesses; the Company's ability to successfully integrate and grow acquisitions; the timing and results of the Company's exploration of strategic alternatives to monetize its Gregory Mountain Products business; 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 can be found under Item 1A.-Risk Factors of this Annual Report on Form 10-K. All forward-looking statements included in this Annual Report on Form 10-K are based upon information available to the Company as of the date of this Annual Report on Form 10-K, 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 Annual Report on Form 10-K.

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 equipment and apparel 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 backcountry and urban activities. Our Black Diamond®, Gregory™, POC™ and PIEPS™ brands are iconic in the active outdoor, ski and cycling industries 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: technical apparel, rock-climbing equipment (such as carabiners, protection devices, harnesses, belay devices, helmets, and ice-climbing gear), technical backpacks and high-end day packs, lifestyle packs, trekking poles, headlamps and lanterns, and gloves and mittens. We also offer advanced design helmets for skiing, mountain and road cycling, body armor, and goggles for skiing and mountain biking, eyewear, skis, ski poles, ski bindings, ski boots, ski skins, and ski safety products, including avalanche transceivers, shovels, and probes.

On May 28, 2010, we acquired Black Diamond Equipment, Ltd. (which may be referred to as "Black Diamond Equipment" or "BDEL") and Gregory Mountain Products (which may be referred to as "Gregory Mountain Products" or "GMP") (the "Mergers"). On January 20, 2011, the Company changed its name from Clarus Corporation to Black Diamond, Inc., which we believe more accurately reflects our current business. 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.

We believe the following critical accounting policies include the more significant estimates and assumptions used in the preparation of our consolidated financial statements. Our accounting policies are more fully described in Note 1 of our consolidated financial statements.

· We use derivative instruments to hedge currency rate movements on foreign currency denominated sales. We enter into forward contracts, option contracts, and non-deliverable forwards to manage the impact of foreign currency fluctuations on a portion of our forecasted sales denominated in foreign currencies. These derivatives are carried at fair value on our consolidated balance sheets in other assets and accrued liabilities. Changes in fair value of the derivatives not designated as hedge instruments are included in the determination of net income. For derivative contracts designated as hedge instruments, the effective portion of gains and losses resulting from changes in fair value of the instruments are included in accumulated other comprehensive income and reclassified to earnings in the period the underlying hedged item is recognized in earnings.

We use operating budgets and cash flow forecasts to estimate future sales and to determine the level and timing of derivative transactions intended to mitigate such sales in accordance with our risk management policies. If the forecasted sales levels are not reached, our derivative instruments may be deemed to be not effective which may result in foreign currency gains and losses being recorded in our statement of comprehensive income, which could materially affect our financial position and results of operations.

· We sell our products pursuant to customer orders or sales contracts entered into with our customers. Revenue is recognized when title and risk of loss pass to the customer and when collectability is reasonably assured. Charges for shipping and handling fees are included in net sales and the corresponding shipping and handling expenses are included in cost of sales in the accompanying consolidated statements of operations.

At the time of revenue recognition, we also provide for estimated sales returns and miscellaneous claims from customers as reductions to revenues. The estimates are based on historical rates of product returns and claims. However, actual returns and claims in any future period are inherently uncertain and thus may differ from these estimates. If actual or expected returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to sales in the period in which we make such a determination.

· We account for income taxes using the asset and liability method. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. We make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities, and our uncertain tax positions. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for income taxes in our consolidated financial statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of taxable income. Actual operating results and the underlying amount and category of income in future years could cause our current assumptions, judgments and estimates of recoverable net deferred taxes to be inaccurate. Changes in any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, which could materially affect our financial position and results of operations.

· We make ongoing estimates of potential excess, close-out or slow moving inventory. We evaluate our inventory on hand considering our purchase commitments, sales forecasts, and historical experience to identify excess, close-out or slow moving inventory and make provisions as necessary to properly reflect inventory value at the lower of cost or estimated market value. If we determine that a smaller or larger reserve is appropriate, we will record a credit or a charge to cost of sales in the period in which we make such a determination.

· Indefinite-lived intangible assets, consisting of trademarks are not subject to amortization. Rather, we qualitatively evaluate those assets for possible impairment on an annual basis or more frequently if events or changes in circumstances indicate that it is more likely than not that the carrying value of an asset may exceed its fair value. If our analysis leads us to believe that it is more likely than not that the carrying value of an asset may exceed its fair value, we perform a quantitative analysis based on an income approach using the relief-from-royalty method. Under this method, forecasted revenues for a trademark are assigned a royalty rate that would be charged to license the trademark (in lieu of ownership) from an independent party, and fair value is the present value of those forecasted royalties avoided by owning the trademark. If the fair value of the trademark intangible asset exceeds its carrying value, there is no impairment charge. If the fair value of the asset is less than its carrying value, an impairment charge would be recognized for the difference.

· We assess the recoverability of the carrying value of goodwill by making a qualitative or quantitative assessment. If we begin with a qualitative assessment and are able to support the conclusion that it is not more likely than not that the fair value of the Company is less than its carrying value, it is not required to perform the two-step impairment test. Otherwise, using the two-step approach is required. In the first step of the goodwill impairment test, we compare the carrying value the Company, including its recorded goodwill, to the estimated fair value. We estimate the fair value using an equity-value based and enterprise-value based methodology. The principal method used is an equity-value based method in which the Company's market-cap is compared to the net book value. In the enterprise-value based method, the fair value of the Company is estimated by taking its market-cap plus interest bearing debt, which equals the enterprise value. This value is then compared to total assets, less non-interest bearing debt. If the fair value of the Company exceeds its carrying value, the goodwill is not impaired and no further review is required. However, if the fair value of the business unit is less than its carrying value, we perform the second step of the goodwill impairment test to determine the amount of the impairment charge, if any. The second step involves a hypothetical allocation of the fair value of the Company to its net tangible and intangible assets (excluding goodwill) as if the business unit were newly acquired, which results in an implied fair value of goodwill. The amount of the impairment charge is the excess of the recorded goodwill over the implied fair value of goodwill.

Recent Accounting Pronouncements

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

Results of Operations (In Thousands)

Consolidated Year Ended December 31, 2013 Compared to Consolidated Year Ended December 31, 2012

The following presents a discussion of consolidated operations for the year ended December 31, 2013, compared with the consolidated year ended December 31, 2012.

                                        Year Ended December 31,
                                          2013             2012

Sales
Domestic sales                        $     78,855       $  74,600
International sales                        124,181         101,277
Total sales                                203,036         175,877

Cost of goods sold                         125,551         108,613
Gross profit                                77,485          67,264

Operating expenses
Selling, general and administrative         81,381          62,590
Restructuring charge                           175             225
Merger and integration                         565             244
Transaction costs                               54           2,029

Total operating expenses                    82,175          65,088

Operating (loss) income                     (4,690 )         2,176

Other (expense) income
Interest expense, net                       (3,583 )        (2,958 )
Other, net                                     330             870

Total other expense, net                    (3,253 )        (2,088 )

(Loss) income before income tax             (7,943 )            88
Income tax benefit                          (2,073 )        (1,864 )
Net (loss) income                     $     (5,870 )     $   1,952

Sales

Consolidated sales increased $27,159, or 15.4%, to $203,036 during the year ended December 31, 2013 compared to consolidated sales of $175,877 during the year ended December 31, 2012. The increase in sales was attributable to the inclusion of POC and PIEPS for the full year ended December 31, 2013, the addition of apparel sales by Black Diamond Equipment and an 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. Sales also increased due to an increase in the quantity and average sales price of new and existing climb, mountain, and ski products sold during the period, partially offset by evolving industry purchasing trends, which we believe have stabilized during the year ended December 31, 2013. We also experienced an increase in sales of $295 due to the strengthening of foreign currencies against the U.S. dollar during the year ended December 31, 2013.

Consolidated domestic sales increased $4,255, or 5.7%, to $78,855 during the year ended December 31, 2013 compared to consolidated domestic sales of $74,600 during the year ended December 31, 2012. The increase in domestic sales was primarily attributable to the inclusion of POC for the full year ended December 31, 2013 and the addition of apparel sales by Black Diamond Equipment, partially offset by evolving industry purchasing trends, which we believe have stabilized during the year ended December 31, 2013.

Consolidated international sales increased $22,904, or 22.6%, to $124,181 during the year ended December 31, 2013 compared to consolidated international sales of $101,277 during the year ended December 31, 2012. The increase in international sales was primarily attributable to the inclusion of POC and PIEPS for the full year ended December 31, 2013, the addition of apparel sales by Black Diamond Equipment, and an increase in Gregory's sales in Japan as a result of the transition of the Japanese distribution of Gregory's products from A&F, the prior distributor of Gregory's products in Japan, to Gregory. We also experienced an increase in sales of $295 due to the strengthening of foreign currencies against the U.S. dollar during the year ended December 31, 2013.

Cost of Goods Sold

Consolidated cost of goods sold increased $16,938, or 15.6%, to $125,551 during the year ended December 31, 2013 compared to consolidated cost of goods sold of $108,613 during the year ended December 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 for the full year ended December 31, 2013 as well as the impact of the voluntary recall of all of the PIEPS VECTOR avalanche transceivers of $1,541.

Gross Profit

Consolidated gross profit increased $10,221 or 15.2%, to $77,485 during the year ended December 31, 2013 compared to consolidated gross profit of $67,264 during the year ended December 31, 2012. Consolidated gross margin was 38.2% during the year ended December 31, 2013 compared to a consolidated gross margin of 38.2% during the year ended December 31, 2012. Consolidated gross margin during the year ended December 31, 2013 was negatively impacted by 0.7% by the voluntary recall of all of the PIEPS VECTOR avalanche transceivers of $1,541. A higher level of close-out and promotional activity also negatively impacted the consolidated gross margin for the year ended December 31, 2013 compared to the year ended December 31, 2012.

Selling, General and Administrative

Consolidated selling, general, and administrative expenses increased $18,791, or 30.0%, to $81,381 during the year ended December 31, 2013 compared to consolidated selling, general, and administrative expenses of $62,590 during the year ended December 31, 2012. The increase in selling, general, and administrative expenses was primarily attributable to the inclusion of POC and PIEPS for the full year ended December 31, 2013, the addition of our Black Diamond Japan GK operations, the Company's investments in its strategic initiatives, such as apparel sold by Black Diamond Equipment, and infrastructure to support both current and anticipated future growth, as well as an increase in stock based compensation expense of $1,405 as a result of the Company issuing fully vested stock option awards.

Restructuring Charges

Consolidated restructuring expense decreased $50, or 22.2%, to $175 during the year ended December 31, 2013 compared to consolidated restructuring expense of $225 during the year ended December 31, 2012. The restructuring expenses incurred during the year ended December 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 $321, or 131.6%, to $565 during the year ended December 31, 2013 compared to consolidated merger and integration expense of $244 during the year ended December 31, 2012, which consisted of expenses related to the integration of POC and PIEPS.

Transaction Costs

Consolidated transaction expense decreased $1,975, or 97.3%, to $54 during the year ended December 31, 2013 compared to consolidated transaction expense of $2,029 during the year ended December 31, 2012, which consisted of professional fees and expenses in 2013 related to the Company's acquisition of POC and PIEPS.

Interest Expense, net

Consolidated interest expense increased $625, or 21.1%, to $3,583 during the year ended December 31, 2013 compared to consolidated interest expense of $2,958 during the year ended December 31, 2012. The increase in interest expense was primarily attributable to higher average outstanding debt amounts during the year ended December 31, 2013 compared to the same period in 2012.

Other, net

Consolidated other, net, decreased to income of $330 during the year ended December 31, 2013 compared to a consolidated other, net income of $870 during the year ended December 31, 2012. The decrease in other, net, was primarily attributable to a decrease in remeasurement gains recognized on the Company's foreign denominated accounts receivable and accounts payable, partially offset by an increase in gains on mark-to-market adjustments on non-hedged foreign currency contracts.

Income Taxes

Consolidated income tax benefit increased $209, or 11.2%, to a benefit of $2,073 during the year ended December 31, 2013 compared to consolidated income tax benefit of $1,864 during the same period in 2012. The increase in income tax benefit is due to a pre-tax loss compared to pre-tax income for the year ended December 31, 2012.

Our effective income tax rate was 26.1% for the year ended December 31, 2013 compared to a benefit of 2,118.2% for the same period in 2012. During the year ended December 31, 2013, a benefit of $230 was recorded as a discrete event for the 2012 federal research credit that was retroactively reinstated in 2013. The decrease in the effective income tax rate is attributable to the near break-even income before income tax for the year ended December 31, 2012 compared to a net loss before income tax of $7,943 for the year ended December 31, 2013.

Consolidated Year Ended December 31, 2012 Compared to Consolidated Year Ended December 31, 2011

The following presents a discussion of consolidated operations for the year ended December 31, 2012 compared with the consolidated year ended December 31, 2011.

                                        Year Ended December 31,
                                          2012             2011

Sales
Domestic sales                        $     74,600       $  62,813
International sales                        101,277          82,962
Total sales                                175,877         145,775

Cost of goods sold                         108,613          89,423
Gross profit                                67,264          56,352

Operating expenses
Selling, general and administrative         62,590          50,493
Restructuring charge                           225             993
Merger and integration                         244               -
Transaction costs                            2,029               -

Total operating expenses                    65,088          51,486

Operating income                             2,176           4,866

Other (expense) income
Interest expense, net                       (2,958 )        (2,889 )
Other, net                                     870             227

Total other expense, net                    (2,088 )        (2,662 )

Income before income tax                        88           2,204
Income tax benefit                          (1,864 )        (2,688 )
Net income                            $      1,952       $   4,892

Sales

Consolidated sales increased $30,102, or 20.6%, to $175,877 during the year ended December 31, 2012 compared to consolidated sales of $145,775 during the year ended December 31, 2011. The increase in sales was attributable to an increase in the quantity and average sales price of new and existing climb and mountain products sold during the period and the inclusion of POC for six months and PIEPS for three months. This increase was partially off-set by a decrease in sales of $2,299 due to the weakening of foreign currencies against the U.S. dollar and not recognizing revenue of $999 on GMP's "inline" inventory shipped to Kabushiki Kaisha A&F ("A&F"), the prior distributor of GMP's products in Japan, as such inventory was repurchased in accordance with the terms of the agreement dated September 28, 2012, between GMP and A&F (the "A&F Agreement") pursuant to which GMP agreed to acquire its Japanese distribution assets from A&F.

Consolidated domestic sales increased $11,787, or 18.8%, to $74,600 during the year ended December 31, 2012 compared to consolidated domestic sales of $62,813 during the year ended December 31, 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.

Consolidated international sales increased $18,315, or 22.1%, to $101,277 during the year ended December 31, 2012 compared to consolidated international sales of $82,962 during the year ended December 31, 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 and PIEPS. This increase was partially off-set by a decrease in sales of $2,299 due to the weakening of foreign currencies against the U.S. dollar and not recognizing revenue of $999 on GMP's "inline" inventory shipped to A&F, the prior distributor of GMP's products in Japan, as such inventory was repurchased in accordance with the terms of the A&F Agreement, pursuant to which GMP acquired its Japanese distribution assets from A&F.

Cost of Goods Sold

Consolidated cost of goods sold increased $19,190, or 21.5%, to $108,613 during the year ended December 31, 2012 compared to consolidated cost of goods sold of $89,423 during the year ended December 31, 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 PIEPS, as well as $2,257 related to the sale of inventory that was recorded at fair value in purchase accounting. All inventory acquired, and related purchase accounting fair market value inventory adjustment, was sold in 2012.

Gross Profit

Consolidated gross profit increased $10,912, or 19.4%, to $67,264 during the year ended December 31, 2012 compared to consolidated gross profit of $56,352 during the year ended December 31, 2011. Consolidated gross margin was 38.2% during the year ended December 31, 2012 compared to a consolidated gross margin of 38.7% during the year ended December 31, 2011. Consolidated gross margin during the year ended December 31, 2012 increased compared to the prior year due to the inclusion of POC and PIEPS; however, it was off-set by a decrease in gross margin of 1.3% 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 $12,097, or 24.0%, to $62,590 during the year ended December 31, 2012 compared to consolidated selling, general, and administrative expenses of $50,493 during the year ended December 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 and the inclusion of POC and PIEPS.

Restructuring Charges

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