UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2011
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-24277
(Exact name of registrant as specified in its charter)
Delaware | 58-1972600 |
(State or other jurisdiction of | |
incorporation or organization) | (I.R.S. Employer Identification Number) |
2084 East 3900 South
Salt Lake City, Utah
(Address of principal executive offices)
84124
(Zip code)
(801) 278-5552
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO[]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO[]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES[] NO[X]
As of October 26, 2011,May 2, 2012, there were 21,763,48430,685,984 shares of common stock, par value $0.0001, outstanding.
INDEX
BLACK DIAMOND, INC.
PART I | FINANCIAL INFORMATION | Page | |
Item 1. | Financial Statements | ||
Condensed Consolidated Balance Sheets – | 3 | ||
Condensed Consolidated Statements of | 4 | ||
Condensed Consolidated Statements of Cash Flows (unaudited) – | |||
Notes to Unaudited Condensed Consolidated Financial Statements – | |||
6 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||
Item 4. | Controls and Procedures | ||
PART II | OTHER INFORMATION | ||
Item 1. | Legal Proceedings | ||
Item 1A. | Risk Factors | ||
Item 6. | Exhibits | ||
Signature Page | 23 | ||
Exhibit Index | 24 |
PART I. FINANCIAL INFORMATION
BLACK DIAMOND, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, 2011 | December 31, 2010 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 1,677 | $ | 2,767 | ||||
Accounts receivable, less allowance for doubtful accounts of $442 and $353, respectively | 28,435 | 20,293 | ||||||
Inventories | 45,178 | 34,942 | ||||||
Prepaid and other current assets | 2,827 | 2,527 | ||||||
Income tax receivable | 297 | 376 | ||||||
Deferred income taxes | 1,698 | 1,698 | ||||||
Total Current Assets | 80,112 | 62,603 | ||||||
Property and equipment, net | 14,731 | 14,740 | ||||||
Definite lived intangible assets, net | 16,441 | 17,439 | ||||||
Indefinite lived intangible assets | 32,650 | 32,650 | ||||||
Goodwill | 38,226 | 38,226 | ||||||
Deferred income taxes | 45,350 | 45,957 | ||||||
Other long-term assets | 1,055 | 1,064 | ||||||
TOTAL ASSETS | $ | 228,565 | $ | 212,679 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 19,429 | $ | 19,208 | ||||
Current portion of long-term debt | 705 | 308 | ||||||
Total Current Liabilities | 20,134 | 19,516 | ||||||
Long-term debt | 39,768 | 29,456 | ||||||
Other long-term liabilities | 832 | 785 | ||||||
TOTAL LIABILITIES | 60,734 | 49,757 | ||||||
Stockholders' Equity | ||||||||
Preferred stock, $.0001 par value; 5,000 shares authorized; none issued | - | - | ||||||
Common stock, $.0001 par value; 100,000 shares authorized; 21,839 and 21,814 issued and 21,764 and 21,739 outstanding | 2 | 2 | ||||||
Additional paid in capital | 402,129 | 399,475 | ||||||
Accumulated deficit | (236,814 | ) | (238,178 | ) | ||||
Treasury stock, at cost | (2 | ) | (2 | ) | ||||
Accumulated other comprehensive income | 2,516 | 1,625 | ||||||
TOTAL STOCKHOLDERS' EQUITY | 167,831 | 162,922 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 228,565 | $ | 212,679 |
March 31, 2012 | December 31, 2011 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 41,644 | $ | 2,400 | ||||
Accounts receivable, less allowance for doubtful | ||||||||
accounts of $420 and $326, respectively | 29,815 | 22,718 | ||||||
Inventories | 45,472 | 47,137 | ||||||
Prepaid and other current assets | 1,197 | 2,472 | ||||||
Deferred income taxes | 2,270 | 2,270 | ||||||
Total Current Assets | 120,398 | 76,997 | ||||||
Property and equipment, net | 14,882 | 14,019 | ||||||
Definite lived intangible assets, net | 15,776 | 16,108 | ||||||
Indefinite lived intangible assets | 32,650 | 32,650 | ||||||
Goodwill | 38,226 | 38,226 | ||||||
Deferred income taxes | 47,115 | 48,429 | ||||||
Other long-term assets | 1,321 | 1,298 | ||||||
TOTAL ASSETS | $ | 270,368 | $ | 227,727 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 15,402 | $ | 16,090 | ||||
Income tax payable | 74 | 254 | ||||||
Current portion of long-term debt | 661 | 673 | ||||||
Total Current Liabilities | 16,137 | 17,017 | ||||||
Long-term debt | 15,270 | 37,397 | ||||||
Other long-term liabilities | 1,186 | 1,139 | ||||||
TOTAL LIABILITIES | 32,593 | 55,553 | ||||||
Stockholders' Equity | ||||||||
Preferred stock, $.0001 par value; 5,000 | ||||||||
shares authorized; none issued | - | - | ||||||
Common stock, $.0001 par value; 100,000 shares authorized; | ||||||||
30,756 and 21,839 issued and 30,681 and 21,764 outstanding | 3 | 2 | ||||||
Additional paid in capital | 465,784 | 402,716 | ||||||
Accumulated deficit | (230,696 | ) | (233,286 | ) | ||||
Treasury stock, at cost | (2 | ) | (2 | ) | ||||
Accumulated other comprehensive income | 2,686 | 2,744 | ||||||
TOTAL STOCKHOLDERS' EQUITY | 237,775 | 172,174 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 270,368 | $ | 227,727 |
See accompanying notes to unaudited condensed consolidated financial statements.
BLACK DIAMOND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED | ||||||||
September 30, 2011 | September 30, 2010 | |||||||
Sales | ||||||||
Domestic sales | $ | 15,868 | $ | 14,056 | ||||
International sales | 26,172 | 19,890 | ||||||
Total sales | 42,040 | 33,946 | ||||||
Cost of goods sold | 26,043 | 24,411 | ||||||
Gross profit | 15,997 | 9,535 | ||||||
Operating expenses | ||||||||
Selling, general and administrative | 12,824 | 10,764 | ||||||
Restructuring charge | 219 | 772 | ||||||
Merger and integration | - | 88 | ||||||
Transaction costs | - | 313 | ||||||
Total operating expenses | 13,043 | 11,937 | ||||||
Operating income (loss) | 2,954 | (2,402 | ) | |||||
Other (expense) income | ||||||||
Interest expense | (720 | ) | (644 | ) | ||||
Interest income | 5 | 6 | ||||||
Other, net | (702 | ) | (1,586 | ) | ||||
Total other expense, net | (1,417 | ) | (2,224 | ) | ||||
Income (loss) before income tax | 1,537 | (4,626 | ) | |||||
Income tax provision (benefit) | 530 | (1,332 | ) | |||||
Net income (loss) | $ | 1,007 | $ | (3,294 | ) | |||
Earnings (loss) per share: | ||||||||
Basic | $ | 0.05 | $ | (0.15 | ) | |||
Diluted | 0.05 | (0.15 | ) | |||||
Weighted average shares oustanding: | ||||||||
Basic | 21,855 | 21,731 | ||||||
Diluted | 22,101 | 21,731 |
THREE MONTHS ENDED | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Sales | ||||||||
Domestic sales | $ | 18,815 | $ | 15,830 | ||||
International sales | 27,604 | 23,228 | ||||||
Total sales | 46,419 | 39,058 | ||||||
Cost of goods sold | 27,803 | 23,987 | ||||||
Gross profit | 18,616 | 15,071 | ||||||
Operating expenses | ||||||||
Selling, general and administrative | 13,775 | 12,329 | ||||||
Restructuring charge | - | 774 | ||||||
Transaction costs | 112 | - | ||||||
Total operating expenses | 13,887 | 13,103 | ||||||
Operating income | 4,729 | 1,968 | ||||||
Other (expense) income | ||||||||
Interest expense | (742 | ) | (728 | ) | ||||
Interest income | 12 | 10 | ||||||
Other, net | 290 | 418 | ||||||
Total other expense, net | (440 | ) | (300 | ) | ||||
Income before income tax | 4,289 | 1,668 | ||||||
Income tax expense | 1,699 | 500 | ||||||
Net income | 2,590 | 1,168 | ||||||
Other comprehensive (loss) income: | ||||||||
Foreign currency translation adjustment, net of taxes | 480 | 372 | ||||||
Unrealized loss on hedging activities, net of taxes | (538 | ) | (153 | ) | ||||
Other comprehensive (loss) income | (58 | ) | 219 | |||||
Comprehensive income | $ | 2,532 | $ | 1,387 | ||||
Earnings per share: | ||||||||
Basic | $ | 0.10 | $ | 0.05 | ||||
Diluted | 0.10 | 0.05 | ||||||
Weighted average shares oustanding: | ||||||||
Basic | 25,677 | 21,831 | ||||||
Diluted | 25,984 | 21,951 |
See accompanying notes to unaudited condensed consolidated financial statements.
BLACK DIAMOND, INC.
PREDECESSOR COMPANY | ||||||||||||
FIVE MONTHS | ||||||||||||
NINE MONTHS ENDED | ENDED | |||||||||||
September 30, 2011 | September 30, 2010 | May 28, 2010 | ||||||||||
Sales | ||||||||||||
Domestic sales | $ | 44,670 | $ | 18,092 | $ | 15,751 | ||||||
International sales | 64,766 | 23,598 | 19,192 | |||||||||
Total sales | 109,436 | 41,690 | 34,943 | |||||||||
Cost of goods sold | 67,333 | 30,347 | 21,165 | |||||||||
Gross profit | 42,103 | 11,343 | 13,778 | |||||||||
Operating expenses | ||||||||||||
Selling, general and administrative | 37,084 | 18,963 | 12,138 | |||||||||
Restructuring charge | 993 | 2,149 | - | |||||||||
Merger and integration | - | 868 | - | |||||||||
Transaction costs | - | 5,075 | - | |||||||||
Total operating expenses | 38,077 | 27,055 | 12,138 | |||||||||
Operating income (loss) | 4,026 | (15,712 | ) | 1,640 | ||||||||
Other (expense) income | ||||||||||||
Interest expense | (2,157 | ) | (980 | ) | (165 | ) | ||||||
Interest income | 31 | 45 | 3 | |||||||||
Other, net | 145 | (1,474 | ) | 1,803 | ||||||||
Total other (expense) income, net | (1,981 | ) | (2,409 | ) | 1,641 | |||||||
Income (loss) before income tax | 2,045 | (18,121 | ) | 3,281 | ||||||||
Income tax provision (benefit) | 681 | (69,765 | ) | 966 | ||||||||
Net income | $ | 1,364 | $ | 51,644 | $ | 2,315 |
Earnings per share: | ||||||||||||
Basic | $ | 0.06 | $ | 2.71 | ||||||||
Diluted | 0.06 | 2.67 | ||||||||||
Weighted average shares oustanding: | ||||||||||||
Basic | 21,841 | 19,092 | ||||||||||
Diluted | 22,033 | 19,339 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
THREE MONTHS ENDED | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net income | $ | 2,590 | $ | 1,168 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation on property and equipment | 771 | 607 | ||||||
Amortization of intangible assets | 332 | 332 | ||||||
Accretion of notes payable | 246 | 267 | ||||||
Loss on disposition of assets | 1 | 238 | ||||||
Stock-based compensation | 404 | 899 | ||||||
Deferred income taxes | 1,046 | (187 | ) | |||||
Changes in operating assets and liablities: | ||||||||
Accounts receivable | (7,114 | ) | (4,160 | ) | ||||
Inventories | 2,116 | 2,455 | ||||||
Prepaid and other current assets | 1,155 | 1,031 | ||||||
Accounts payable and accrued liabilities | (1,028 | ) | (2,237 | ) | ||||
Net Cash Provided By Operating Activities | 519 | 413 | ||||||
Cash Flows From Investing Activities: | ||||||||
Purchase of property and equipment | (1,606 | ) | (1,464 | ) | ||||
Net Cash Used In Investing Activities | (1,606 | ) | (1,464 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
(Repayment of) proceeds from long-term debt, revolving lines of credit and capital leases | (22,385 | ) | 3,499 | |||||
Proceeds from exercise of stock options | 30 | - | ||||||
Proceeds from the sale of common stock, net | 62,634 | - | ||||||
Net Cash Provided By Financing Activities | 40,279 | 3,499 | ||||||
Effect of foreign exchange rates on cash | 52 | 17 | ||||||
Change in Cash and Cash Equivalents | 39,244 | 2,465 | ||||||
Cash and Cash Equivalents, beginning of period | 2,400 | 2,767 | ||||||
Cash and Cash Equivalents, end of period | $ | 41,644 | $ | 5,232 | ||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Cash paid for income taxes | $ | 286 | $ | 96 | ||||
Cash paid for interest | $ | 495 | $ | 450 |
See accompanying notes to unaudited condensed consolidated financial statements.
5 |
PREDECESSOR COMPANY | ||||||||||||
FIVE MONTHS | ||||||||||||
NINE MONTHS ENDED | ENDED | |||||||||||
September 30, 2011 | September 30, 2010 | May 28, 2010 | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income | $ | 1,364 | $ | 51,644 | $ | 2,315 | ||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||
Depreciation on property and equipment | 2,358 | 1,170 | 865 | |||||||||
Amortization of intangible assets | 998 | 444 | 2 | |||||||||
Accretion of notes payable | 755 | 336 | 17 | |||||||||
Loss on disposition of assets | 209 | 597 | 1 | |||||||||
Stock based compensation | 2,503 | 4,423 | 375 | |||||||||
Deferred income taxes | 649 | (70,354 | ) | (166 | ) | |||||||
Changes in operating assets and liablities, net of acquisitions: | ||||||||||||
Accounts receivable | (8,022 | ) | (9,504 | ) | 4,063 | |||||||
Inventories | (9,165 | ) | (1,498 | ) | (343 | ) | ||||||
Prepaid and other current assets | (308 | ) | 71 | (1,387 | ) | |||||||
Accounts payable and accrued liabilities | (224 | ) | 2,488 | 1,670 | ||||||||
Deferred rent | - | (446 | ) | - | ||||||||
Net Cash (Used In) Provided By Operating Activities | (8,883 | ) | (20,629 | ) | 7,412 | |||||||
Cash Flows From Investing Activities: | ||||||||||||
Purchase of marketable securities | - | (22,065 | ) | - | ||||||||
Proceeds from maturity and sales of marketable securities | - | 46,124 | - | |||||||||
Purchase of businesses, net of cash received | - | (82,560 | ) | - | ||||||||
Purchase of intangible assets | - | - | (10 | ) | ||||||||
Proceeds from disposition of property and equipment | 30 | - | 10 | |||||||||
Purchase of property and equipment | (2,487 | ) | (761 | ) | (788 | ) | ||||||
Net Cash Used In Investing Activities | (2,457 | ) | (59,262 | ) | (788 | ) | ||||||
Cash Flows From Financing Activities: | ||||||||||||
Proceeds from (repayment of) long-term debt, revolving lines of credit and capital leases | 9,954 | 19,098 | (6,261 | ) | ||||||||
Proceeds from exercise of stock options | 151 | 1,005 | - | |||||||||
Proceeds from the sale of stock | - | 2,903 | - | |||||||||
Net Cash Provided By (Used In) Financing Activities | 10,105 | 23,006 | (6,261 | ) | ||||||||
Effect of foreign exchange rates on cash | 145 | 114 | (60 | ) | ||||||||
Change in Cash and Cash Equivalents | (1,090 | ) | (56,771 | ) | 303 | |||||||
Cash and Cash Equivalents, beginning of period | 2,767 | 58,363 | 1,317 | |||||||||
Cash and Cash Equivalents, end of period | $ | 1,677 | $ | 1,592 | $ | 1,620 | ||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||
Cash (received) paid for income taxes | $ | (46 | ) | $ | 1,573 | $ | 596 | |||||
Cash paid for interest | $ | 1,345 | $ | 554 | $ | 183 | ||||||
Supplemental Disclosures of Non-Cash Investing and Financing Activities: | ||||||||||||
Stock issued for acquisition | $ | - | $ | 19,465 | $ | - | ||||||
Notes and deferred compensation issued in acquisition | $ | - | $ | 13,436 | $ | - |
BLACK DIAMOND, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
NOTE 1. BASIS OF PRESENTATION AND ORGANIZATION
The accompanying unaudited condensed consolidated financial statements of Black Diamond, Inc. and subsidiaries (“Black Diamond” or the “Company,” which may be referred to as “we,” “us,” or “our”) as of and for the three and nine months ended September 30,March 31, 2012 and 2011, and 2010, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included. The results of the three and nine months ended September 30, 2011March 31, 2012 are not necessarily indicative of the results to be obtained for the year ending December 31, 2011.2012. These interim financial statements should be read in conjunction with the Company's audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010,2011, filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Certain costs are estimated for the full year and allocated to interim periods based on estimates of time expired, benefit received, or activity associated with the interim period. Actual results could differ from these estimates. Some of the more significant estimates relate to revenue recognition, hedge accounting, allowance for doubtful accounts, inventory, product warranty, stock-based compensation, long-lived and intangible assets and income taxes.
Nature of Business
Black Diamond is a leader in designing, manufacturing and bringing to market innovative active outdoor performance products for climbing, mountaineering, backpacking, skiing and other active outdoor recreation activities for a wide range of year-round use. Our principal brands include Black Diamond® and GregoryTM, through which we target the demanding requirements of core climbers and skiers, more general outdoor performance enthusiasts and consumers interested in outdoor-inspired gear for their urban activities. Our Black Diamond® and GregoryTM brands are iconic in the active outdoor industry and are linked intrinsically with the modern history of the sports we serve. We believe our brands are synonymous with performance, innovation, durability and safety that the climbing, mountaineering, skiing and backpacking communities rely on and embrace in their active lifestyle.
Significant Accounting Policies
There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Recent Accounting Pronouncements
On May 12, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU No. 2011-04 was issued concurrently with International Financial Reporting Standards (“IFRS”) 13Fair Value Measurements, to provide largely identical guidance about fair value measurement and disclosure requirements. The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP. This standard is effective prospectively for interim and annual periods beginning after December 15, 2011.2011 (for us this was our 2012 first quarter). The Company does not expectadopted the adoptionprovisions of this standard toupdate during the three months ended March 31, 2012, but did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
On June 16, 2011, the FASB issued ASU No. 2011-05,Presentation of Comprehensive Income. ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 (for us this will bewas our 2012 first quarter), with early adoption permitted. The Company believesadopted the adoptionprovisions of this update will changeduring the three months ended March 31, 2012, which changed the order in which certain financial statements are presented and provideprovides additional detail on those financial statements whenas applicable, but willdid not have any other impact on our financial statements.
BLACK DIAMOND, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
NOTE 2. PUBLIC OFFERING
On February 22, 2012, Black Diamond consummated the individual historical resultsclosing of a public offering (the “Offering”) of 7,750 shares of the Company, BDEL and GMP, with adjustmentsCompany’s common stock, plus an additional 1,163 shares of common stock to give effectcover an over-allotment option granted to the combined operations as ifunderwriters, at a price to the Mergers had been consummatedpublic of $7.50 per share (the “Offering Price”). Included in the total number of shares of common stock sold in the Offering were 1,333 shares of common stock purchased at the beginningOffering Price by certain of the Company’s officers, directors and employees (the “Reserved Shares”). The Reserved Shares are subject to lock-up agreements restricting the sales of such shares for a period presented.of 90 days, subject to extension under certain circumstances. The pro forma results are intendedunderwriters received an underwriting discount of 6%, or $0.45 per share, in connection with the sale of the shares of common stock in the Offering, other than with respect to the sale of the Reserved Shares, for information purposes only and dowhich the underwriters did not purport to represent whatreceive any underwriting discount. The underwriters exercised the combined companies’ results of operations would actually have been had the transactionsoverallotment option in fact occurredfull at the beginningclosing of the earliest period presented.
PRO FORMA | ||||
NINE MONTHS ENDED | ||||
September 30, 2010 | ||||
Sales | $ | 90,794 | ||
Net income | $ | 54,532 | ||
Earnings per share - basic | $ | 2.86 | ||
Earnings per share - diluted | $ | 2.82 |
NOTE 3. INVENTORIES
Inventories, as of September 30, 2011March 31, 2012 and December 31, 2010,2011, were as follows:
September 30, 2011 | December 31, 2010 | |||||||
Finished goods | $ | 38,546 | $ | 29,192 | ||||
Work-in-process | 941 | 801 | ||||||
Raw materials and supplies | 5,691 | 4,949 | ||||||
$ | 45,178 | $ | 34,942 |
March 31, 2012 | December 31, 2011 | |||||||
Finished goods | $ | 39,129 | $ | 41,325 | ||||
Work-in-process | 1,058 | 888 | ||||||
Raw materials and supplies | 5,285 | 4,924 | ||||||
$ | 45,472 | $ | 47,137 |
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment, net as of September 30, 2011March 31, 2012 and December 31, 2010,2011, were as follows:
September 30, 2011 | December 31, 2010 | |||||||
Land | $ | 2,850 | $ | 2,850 | ||||
Building and improvements | 3,439 | 3,011 | ||||||
Furniture and fixtures | 3,317 | 2,043 | ||||||
Computer hardware and software | 3,296 | 2,726 | ||||||
Machinery and equipment | 6,921 | 6,419 | ||||||
Construction in progress | 1,070 | 1,431 | ||||||
20,893 | 18,480 | |||||||
Less accumulated depreciation | (6,162 | ) | (3,740 | ) | ||||
$ | 14,731 | $ | 14,740 |
March 31, 2012 | December 31, 2011 | |||||||
Land | $ | 2,850 | $ | 2,850 | ||||
Building and improvements | 3,678 | 3,498 | ||||||
Furniture and fixtures | 3,488 | 3,301 | ||||||
Computer hardware and software | 3,850 | 3,387 | ||||||
Machinery and equipment | 7,660 | 7,428 | ||||||
Construction in progress | 1,265 | 640 | ||||||
22,791 | 21,104 | |||||||
Less accumulated depreciation | (7,909 | ) | (7,085 | ) | ||||
$ | 14,882 | $ | 14,019 |
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
There were no changes in goodwill during the three and nine months ended September 30, 2011.
Indefinite Lived Intangible Assets
The Company owns certain tradenames and trademarks which provide Black Diamond Equipment, Ltd. (“Black Diamond Equipment” or “BDEL”) and Gregory Mountain Products, Inc. (“Gregory” or “GMP”) with the exclusive and perpetual rights to manufacture and sell their respective products. There were no changes in tradenames and trademarks during the three months ended March 31, 2012.
BLACK DIAMOND, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
Definite Lived Intangible Assets, net
Intangible assets such as certain customer relationships, core technologies and product technologies are amortizable over their estimated useful lives. Intangible assets, net of amortization, as of September 30, 2011March 31, 2012 and December 31, 2010,2011, were as follows:
September 30, 2011 | December 31, 2010 | |||||||
Intangibles subject to amortization | ||||||||
Customer relationships | $ | 16,375 | $ | 16,375 | ||||
Core technologies | 1,505 | 1,505 | ||||||
Product technologies | 335 | 335 | ||||||
18,215 | 18,215 | |||||||
Less accumulated amortization | (1,774 | ) | (776 | ) | ||||
$ | 16,441 | $ | 17,439 | |||||
Intangibles not subject to amortization | ||||||||
Tradenames and trademarks | $ | 32,650 | $ | 32,650 |
March 31, 2012 | December 31, 2011 | |||||||
Customer relationships | $ | 16,375 | $ | 16,375 | ||||
Core technologies | 1,505 | 1,505 | ||||||
Product technologies | 335 | 335 | ||||||
18,215 | 18,215 | |||||||
Less accumulated amortization | (2,439 | ) | (2,107 | ) | ||||
$ | 15,776 | $ | 16,108 |
Future amortization expense for definite-lived intangible assets is as follows as of September 30, 2011:
Remainder 2011 | $ | 332 | ||
2012 | 1,330 | |||
2013 | 1,330 | |||
2014 | 1,312 | |||
2015 | 1,275 | |||
Thereafter | 10,862 | |||
$ | 16,441 |
Remainder 2012 | $ | 998 | ||||
2013 | 1,330 | |||||
2014 | 1,312 | |||||
2015 | 1,275 | |||||
2016 | 1,257 | |||||
Thereafter | 9,604 | |||||
$ | 15,776 |
NOTE 6. LONG-TERM DEBT
Long-term debt, net as of September 30, 2011March 31, 2012 and December 31, 2010,2011, was as follows:
September 30, 2011 | December 31, 2010 | |||||||
Revolving credit facility | $ | 24,948 | $ | 14,735 | ||||
5% Senior Subordinated Notes due 2017 | 14,749 | 14,018 | ||||||
Trademark payable | 580 | 706 | ||||||
Capital leases | 196 | 305 | ||||||
40,473 | 29,764 | |||||||
Less current portion | (705 | ) | (308 | ) | ||||
$ | 39,768 | $ | 29,456 |
March 31, 2012 | December 31, 2011 | |||||||
Revolving credit facility | $ | - | $ | 22,356 | ||||
5% Senior Subordinated Notes due 2017 | 15,220 | 14,980 | ||||||
Trademark payable | 593 | 587 | ||||||
Capital leases | 118 | 147 | ||||||
15,931 | 38,070 | |||||||
Less current portion | (661 | ) | (673 | ) | ||||
$ | 15,270 | $ | 37,397 |
The long-term debt agreements contain certain restrictive debt covenants that require the Company and its subsidiaries to maintain a minimum trailing twelve month earnings before interest, taxes, depreciation, and amortization (“EBITDA”), a positive amount of asset coverage, a minimum tangible net worth, and a positive amount of asset coverage.fixed charge coverage ratio. At September 30, 2011,March 31, 2012, the Company was in compliance with all associated covenants.
NOTE 7. OTHER LONG-TERM LIABILITIES
Other long-term liabilities were $832$1,186 and $785$1,139 as of September 30, 2011March 31, 2012 and December 31, 2010,2011, respectively. The balance relatesThese other long-term liabilities relate to a pension liability of the benefit plan for the Company’s European employees that, under U.S. GAAP, is considered to be a defined benefit plan. The Company also has an insurance policy whereby any underfunded amounts related to the pension liability are recoverable from the insurance company. The Company has recorded a receivable of $832$1,186 and $785$1,139 as other long-term assets for the underfunded amount as of September 30, 2011March 31, 2012 and December 31, 2010,2011, respectively.
BLACK DIAMOND, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s primary exchange rate risk management objective is to mitigate the uncertainty of anticipated cash flows attributable to changes in exchange rates. The Company primarily focuses on mitigating changes in cash flows resulting from sales denominated in currencies other than the U.S. dollar. The Company manages this risk primarily by using currency forward and option contracts. If the anticipated transactions are deemed probable, the resulting relationships are formally designated as cash flow hedges.
At March 31, 2012, the Company’s derivative contracts had a remaining maturity of one year or less. The counterparty to these transactions had both long-term and short-term investment grade credit ratings. The maximum net exposure to the counterparty, which is generally limited to the aggregate unrealized gain of all contracts with that counterparty, was less than $63 at March 31, 2012. The Company’s derivative counterparty has strong credit ratings and as a result, the Company does not require collateral to facilitate transactions.
The Company held the following contracts designated as hedged instruments as of September 30, 2011March 31, 2012 and December 31, 2010:
Notional | Latest | |||||
Amount | Maturity | |||||
Foreign exchange contracts - Norwegian Kroners | 2,420 | September-12 | ||||
Foreign exchange contracts - British Pounds | 1,319 | February-13 | ||||
Foreign exchange contracts - Euros | 12,240 | February-13 | ||||
Foreign exchange contracts - Swiss Francs | 17,061 | February-13 | ||||
Foreign exchange contracts - Canadian Dollars | 8,592 | March-13 |
December 31, 2011 | ||||||
Notional | Latest | |||||
Amount | Maturity | |||||
Foreign exchange contracts - Norwegian Kroners | 3,633 | September-12 | ||||
Foreign exchange contracts - British Pounds | 1,632 | February-13 | ||||
Foreign exchange contracts - Euros | 14,937 | February-13 | ||||
Foreign exchange contracts - Swiss Francs | 24,225 | February-13 | ||||
Foreign exchange contracts - Canadian Dollars | 9,141 | March-13 |
The Company accounts for these contracts as cash flow hedges and tests effectiveness by determining whether changes in the cash flow of the derivative offset, within a range, changes in the cash flow of the hedged item. For contracts that qualify as effective 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 sales in the period the underlying hedge item is recognized in earnings. $245$1 and $0$(210) were reclassified to sales during the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively, and $(30) and $0 were reclassified to sales during the nine months ended September 30, 2011 and 2010, respectively.
As of December 31, 2010,2011, the Company reported an accumulated derivative instrument lossgain of $(237).$506. During the ninethree months ended September 30, 2011,March 31, 2012, the Company reported an adjustment to accumulated other comprehensive income of $58,$(538), as a result of the change in fair value of these contracts, resulting in an accumulated derivative instrument loss of $(179)$(32) reported as of September 30, 2011.
The following table presents the balance sheet classification and fair value of derivative instruments as of September 30, 2011March 31, 2012 and December 31, 2010:
Classification | September 30, 2011 | December 31, 2010 | |||||||
Derivative instruments in asset positions: | |||||||||
Forward exchange contracts | Prepaid and other current assets | $ | 700 | $ | 1,346 | ||||
Derivative instruments in liability positions: | |||||||||
Forward exchange contracts | Accounts payable and accrued liabilities | $ | 742 | $ | 1,387 |
BLACK DIAMOND, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
Classification | March 31, 2012 | December 31, 2011 | ||||||||
Derivative instruments in asset positions: | ||||||||||
Forward exchange contracts | Prepaid and other current assets | $ | 180 | $ | 842 | |||||
Derivative instruments in liability positions: | ||||||||||
Forward exchange contracts | Accounts payable and accrued liabilities | $ | 243 | $ | 156 |
NOTE 9. FAIR VALUE OF MEASUREMENTS
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, under a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1- | inputs to the valuation methodology are quoted market prices for identical assets or liabilities in active markets. | |
Level 2- | inputs to the valuation methodology include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. | |
Level 3- | inputs to the valuation methodology are based on prices or valuation techniques that are unobservable. |
Assets and liabilities measured at fair value on a recurring basis at September 30, 2011March 31, 2012 and December 31, 20102011 were as follows:
September 30, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Forward exchange contracts | $ | - | $ | 700 | $ | - | $ | 700 | ||||||||
$ | - | $ | 700 | $ | - | $ | 700 | |||||||||
Liabilities | ||||||||||||||||
Forward exchange contracts | $ | - | $ | 742 | $ | - | $ | 742 | ||||||||
$ | - | $ | 742 | $ | - | $ | 742 |
December 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Forward exchange contracts | $ | - | $ | 1,346 | $ | - | $ | 1,346 | ||||||||
$ | - | $ | 1,346 | $ | - | $ | 1,346 | |||||||||
Liabilities | ||||||||||||||||
Forward exchange contracts | $ | - | $ | 1,387 | $ | - | $ | 1,387 | ||||||||
$ | - | $ | 1,387 | $ | - | $ | 1,387 |
March 31, 2012 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Forward exchange contracts | $ | - | $ | 180 | $ | - | $ | 180 | ||||||||
$ | - | $ | 180 | $ | - | $ | 180 | |||||||||
Liabilities | ||||||||||||||||
Forward exchange contracts | $ | - | $ | 243 | $ | - | $ | 243 | ||||||||
$ | - | $ | 243 | $ | - | $ | 243 |
December 31, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Forward exchange contracts | $ | - | $ | 842 | $ | - | $ | 842 | ||||||||
$ | - | $ | 842 | $ | - | $ | 842 | |||||||||
Liabilities | ||||||||||||||||
Forward exchange contracts | $ | - | $ | 156 | $ | - | $ | 156 | ||||||||
$ | - | $ | 156 | $ | - | $ | 156 |
BLACK DIAMOND, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
NOTE 10. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing earnings (loss) by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per share is computed by dividing earnings (loss) by the total of the weighted average number of shares of common stock outstanding during each period, plus the effect of outstanding stock options and unvested restricted stock grants. Potentially dilutive securities are excluded from the computation of diluted earnings (loss) per share if their effect is anti-dilutive.
The following table is a reconciliation of basic and diluted shares of common stock outstanding used in the calculation of earnings (loss) per share:
THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||||
Weighted average shares outstanding - basic | 21,855 | 21,731 | 21,841 | 19,092 | ||||||||||||
Effect of dilutive stock options | 246 | - | 192 | 36 | ||||||||||||
Effect of dilutive unvested restricted stock | - | - | - | 211 | ||||||||||||
Weighted average shares outstanding - diluted | 22,101 | 21,731 | 22,033 | 19,339 | ||||||||||||
Earnings (loss) per share: | ||||||||||||||||
Basic | $ | 0.05 | $ | (0.15 | ) | $ | 0.06 | $ | 2.71 | |||||||
Diluted | 0.05 | (0.15 | ) | 0.06 | 2.67 |
THREE MONTHS ENDED | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Weighted average shares outstanding - basic | 25,677 | 21,831 | ||||||
Effect of dilutive stock options | 307 | 120 | ||||||
Weighted average shares outstanding - diluted | 25,984 | 21,951 | ||||||
Earnings per share: | ||||||||
Basic | $ | 0.10 | $ | 0.05 | ||||
Diluted | 0.10 | 0.05 |
For the three and nine months ended September 30, 2011,March 31, 2012, diluted earnings per share excludes the anti-dilutive effect of options to purchase 613 and 848, respectively,430 shares of common stock whose exercise prices were higher than the average market price of the Company’s common stock for the three and nine months ended September 30, 2011March 31, 2012 and 750 shares of unvested restricted stock as their required performance or market conditions were not met.
For the three months ended September 30, 2010, basic net loss per share was the same as diluted net loss per share because all potentially dilutive securities were anti-dilutive due to the net loss for the period. For the nine months ended September 30, 2010,March 31, 2011, diluted earnings per share excludes the anti-dilutive effect of options to purchase 1,563963 shares of common stock whose exercise prices were higher than the average market price of the Company’s common stock for the ninethree months ended September 30, 2010March 31, 2011 and 500750 shares of unvested restricted stock as their required performance or market conditions were not met.
NOTE 11. STOCK-BASED COMPENSATION PLAN
Under the Company’s 2005 Stock Incentive Plan (the “2005 Plan”), the Board of Directors has flexibility to determine the type and amount of awards to be granted to eligible participants, who must be employees, directors, officers or consultants of the Company or its subsidiaries. The 2005 Plan allows for grants of incentive stock options, nonqualified stock options, restricted stock awards, stock appreciation rights, and restricted units. The aggregate number of shares of common stock that may be granted through awards under the 2005 Plan to any employee in any calendar year may not exceed 500 shares. The 2005 Plan will continue in effect until June 2015 unless terminated sooner.
During the ninethree months ended September 30, 2011,March 31, 2012, the Company issued 15898 stock options, under the Company’s 2005 Plan, to directors and employees of the Company. Of the 158Company, which options issued, 40 will vest in four equal consecutive quarterly tranches from the date of grant, 38granted will vest in three installments as follows: 1539 shares shall vest on December 31, 20122014 and the remaining shares shall vest equally on December 31, 20132015 and December 31, 2014. The remaining 80 options granted will vest in three installments as follows: 32 shares shall vest on December 31, 2013 and the remaining shares shall vest equally on December 31, 2014 and December 31, 2015.
For computing the fair value of the stock-based awards, the fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions:
BLACK DIAMOND, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
Options Granted During NineThree Months Ended September 30, 2011
Number of Options | |
Option Vesting Period | |
Grant Price | $ |
Dividend Yield | 0.00% |
Expected Volatility (a) | |
Risk-free Interest Rate | |
Expected Life (Years) | |
Weighted Average Fair Value | $ |
(a) | Since the Company’s historical volatility was not representative of the ongoing future business, the Company’s historical volatility was based on a combination of the Company’s volatility and the historical volatility of a peer group of companies within similar industries and similar size as the Company. |
Using these assumptions, the fair value of the stock options granted during the ninethree months ended September 30, 2011March 31, 2012 was $667,$441, which will be amortized over the vesting period of the options.
The total non-cash stock compensation expense related to stock options and restricted stock recorded by the Company during the three and nine months ended September 30,March 31, 2012 and 2011, and 2010, respectively, was as follows.
THREE MONTHS ENDED | ||||||||
September 30, 2011 | September 30, 2010 | |||||||
Restricted stock | $ | 471 | $ | 572 | ||||
Stock options | 170 | 151 | ||||||
Total | $ | 641 | $ | 723 |
NINE MONTHS ENDED | ||||||||
September 30, 2011 | September 30, 2010 | |||||||
Restricted stock | $ | 2,008 | $ | 1,721 | ||||
Stock options | 495 | 1,874 | ||||||
Restricted stock units | - | 683 | ||||||
Stock subscription expense | - | 145 | ||||||
Total | $ | 2,503 | $ | 4,423 |
THREE MONTHS ENDED | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Restricted stock | $ | 203 | $ | 766 | ||||
Stock options | 201 | 133 | ||||||
Total | $ | 404 | $ | 899 |
The fair value of unvested restricted stock awards is determined based on the market price of our shares of common stock on the grant date. As of September 30, 2011,March 31, 2012, there were 630743 unvested stock options and unrecognized compensation cost of $1,862$2,138 related to unvested stock options, as well as 750 unvested restricted stock awards and unrecognized compensation cost of $1,194$536 related to unvested restricted stock awards.
THREE MONTHS ENDED | ||||||||
September 30, 2011 | September 30, 2010 | |||||||
Net income (loss) | $ | 1,007 | $ | (3,294 | ) | |||
Foreign currency translation adjustment, net | (344 | ) | - | |||||
Unrealized gain (loss) on hedging activities, net | 493 | (205 | ) | |||||
Comprehensive income (loss) | $ | 1,156 | $ | (3,499 | ) |
NINE MONTHS ENDED | ||||||||
September 30, 2011 | September 30, 2010 | |||||||
Net income | $ | 1,364 | $ | 51,644 | ||||
Unrealized loss on marketable securities, net | - | (6 | ) | |||||
Foreign currency translation adjustment, net | 833 | - | ||||||
Unrealized gain (loss) on hedging activities, net | 58 | (205 | ) | |||||
Comprehensive income | $ | 2,255 | $ | 51,433 |
NOTE 13.12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal disputes and other legal proceedings that arise from time to time in the ordinary course of business. Based on currently available information, the Company does not believe that it is reasonably possible that the disposition of any of the legal disputes the Company or its subsidiaries is currently involved in will have a material adverse effect upon the Company’s consolidated financial condition, results of operations or cash flows. It is possible that, as additional information becomes available, the impact on the Company of an adverse determination could have a different effect.
The Company leases office, warehouse and distribution space under non-cancelable operating leases. As leases expire, it can be expected that, in the normal course of business, certain leases will be renewed or replaced. Certain lease agreements include escalating rents over the lease terms. The Company expenses rent on a straight-line basis over the lease term which commences on the date the Company has the right to control the property. The cumulative expense recognized on a straight-line basis in excess of the cumulative payments is included in accounts payable and accrued liabilities and other long-term liabilities in the accompanying consolidated balance sheets.
Total rent expense of the Company for the three months ended September 30,March 31, 2012 and 2011 was $414 and 2010 was $357 and $373, respectively, and for the nine months ended September 30, 2011 and 2010 was $1,156 and $692,$438, respectively.
BLACK DIAMOND, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
NOTE 14.13. INCOME TAXES
The Company’s foreign operations that are considered to be permanently reinvested have an effective tax rate of 24%25%.
As of December 31, 2010,2011, the Company’s gross deferred tax asset was $91,031.$92,251. The Company has recorded a valuation allowance, resulting in a net deferred tax asset of $69,527,$73,747, excluding deferred tax liabilities. Management has provided a valuation allowance against some of the net deferred income tax assets as of December 31, 2010,2011, because the ultimate realization of those benefits and assets does not meet the more likely than not criteria.
As of December 31, 2010,2011, the Company had net operating loss, research and experimentation credit and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $226,837, $1,501$217,822 ($725 relates to tax windfall, which will not be realized until an income tax payable exists), $1,693 and $56,$261, respectively. The Company's ability to benefit from certain net operating loss and tax credit carryforwards is limited under Section 382 of the Internal Revenue Code, as amended (the “Code”), due to a prior ownership change of greater than 50%. 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.F income and will be offset with the NOL.
Of the $225,786$217,097 of net operating losses available to offset taxable income, $214,160$215,538 does not expire until 2020 or later, subject to compliance with Section 382 of the Internal Revenue Code, as amended (the “Code”) as indicated by the following schedule:
Net Operating Loss Carryforward Expiration Dates
December 31, 2010
Expiration Dates December 31, | Net Operating Loss Amount | |||
2011 | $ | 7,520 | ||
2012 | 5,157 | |||
2020 | 29,533 | |||
2021 | 50,430 | |||
2022 | 115,000 | |||
2023 | 5,712 | |||
2024 | 3,566 | |||
2025 | 1,707 | |||
2026 | 476 | |||
2028 | 1,360 | |||
2029 | 4,074 | |||
2030 | 2,302 | |||
Total | 226,837 | |||
Section 382 Limitation | (1,051 | ) | ||
After Limitations | $ | 225,786 |
Expiration Dates December 31, | Net Operating Loss Amount | ||||
2012 | $ | 1,559 | |||
2020 | 29,533 | ||||
2021 | 50,430 | ||||
2022 | 115,000 | ||||
2023 | 5,712 | ||||
2024 | 3,566 | ||||
2025 | 1,707 | ||||
2026 | 476 | ||||
2028 | 1,360 | ||||
2029 | 4,074 | ||||
2030 | 4,405 | ||||
Total | 217,822 | ||||
Section 382 Limitation | (725 | ) | |||
After Limitations | $ | 217,097 |
NOTE 15.14. RELATED PARTY TRANSACTIONS
Kanders & Company, Inc.
In September 2003, the Company and Kanders & Company, Inc. (“Kanders & Company”), an entity owned and controlled by the Company’s Executive Chairman, Warren B. Kanders, entered into a 15-year lease with a five-year renewal option, as co-tenants with Kanders & Company to lease approximately 11,500 square feet in Stamford, Connecticut. Until May 28, 2010, the Company paid $32 a month for its 75% portion of the lease, Kanders & Company paid $11 a month for its 25% portion of the lease and rent expense was recognized on a straight-line basis. The lease provides the co-tenants with an option to terminate the lease in years eight and ten in consideration for a termination payment. In connection with the lease, the Company obtained a stand-by letter of credit in the amount of $850 to secure lease obligations for the Stamford facility and Kanders & Company reimbursed the Company for a pro rata portion of the approximately $5 annual cost of the letter of credit. As of September 30, 2011,March 31, 2012, the stand-by letter of credit of $850 was reduced to $292.
As of September 30,March 31, 2012 and December 31, 2011, the Company had a payable of $54 owedno amounts outstanding to Kanders & Company. The amount due to Kanders & Company is included
BLACK DIAMOND, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in accrued liabilities in the accompanying condensed consolidated balance sheet. As of December 31, 2010, the Company had a payable of $147 owed to Kanders & Company. The amount due to Kanders & Company was included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets. The outstanding amount as of December 31, 2010 was paid during the three months ended March 31, 2011.
Acquisition of Gregory Mountain Products, Inc.
On May 28, 2010, the Company acquired GMPGregory pursuant to a certain Agreement and Plan of Merger, dated as of May 7, 2010, from each of Kanders GMP Holdings, LLC and Schiller Gregory Investment Company, LLC, as the stockholders of GMPGregory (the “Gregory Stockholders”). 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. In the acquisition of GMP,Gregory, the Company acquired all of the outstanding common stock of GMPGregory for an aggregate amount of approximately $44,100 (after closing adjustments of $889 relating to debt repayments, working capital and equity plan allocation), payable to the Gregory Stockholders in proportion to their respective ownership interests of GMPGregory as follows: (i) the issuance of 2,419 unregistered shares of the Company’s common stock to Kanders GMP Holdings, LLC and 1,256 unregistered shares of the Company’s common stock to Schiller Gregory Investment Company, LLC, and (ii) the issuance by the Company of Merger Consideration Subordinated Notes in the aggregate principal amount of $14,517 to Kanders GMP Holdings, LLC and in the aggregate principal amount of $7,539 to Schiller Gregory Investment Company, LLC. The principal amounts due under the outstanding Merger Consideration 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 Merger Consideration Subordinated Notes at the rate of 5% per annum and are payable quarterly in cash. The acquisition of GMPGregory was approved by a special committee comprised of independent directors of the Company’s Board of Directors.
On April 7, 2011, Schiller Gregory Investment Company, LLC transferred its Merger Consideration Subordinated Note in equal amounts to the Deborah Schiller 2005 Revocable Trust and the Robert R. Schiller Cornerstone Trust. During the three months ended March 31, 2012, $181 in interest was paid to Kanders GMP Holdings, LLC, and $94 in interest was paid to Schiller Gregory Investment Company, LLC, the Deborah Schiller 2005 Revocable Trust and the Robert R. Schiller Cornerstone Trust pursuant to whichthe outstanding Merger Consideration Subordinated Notes.
Public Offering
On February 22, 2012, certain of the Company’s officers, directors and employees, including Messrs. Kanders, Schiller, Mr. Peter R. Metcalf, Mr. Nicholas Sokolow and Mr. Philip N. Duff, purchased an aggregate of 1,333 shares of common stock sold by the Company agreed to use its commercially reasonable efforts to prepare and file within the Securities and Exchange Commission (the “SEC”), as soon as reasonably practicable,Offering of 8,913 shares of common stock at a “shelf” registration statement covering the 3,676 sharesprice of $7.50 per share. The last reported sale price of the Company’s common stock received by the Gregory Stockholders as parton February 15, 2012 prior to pricing of the consideration received by them in connection with the acquisition of GMP. In addition, in the event that the Company files a registration statement during any period that there is not an effective registration statement covering all of the shares received by the Gregory Stockholders in the acquisition, the Gregory Stockholders shall have “piggyback” rights, subject to customary underwriter cutbacks. On July 29, 2011, the Company filed a prospectus supplement with the SEC covering the shares of the Company’s common stock received by the GMP stockholders and certain other officers and employees of the Company.
BLACK DIAMOND, INC.
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 leader in designing, manufacturing and bringing to market innovative active outdoor performance products for climbing, mountaineering, backpacking, skiing and other active outdoor recreation activities for a wide range of year-round use. Our principal brands include Black Diamond® and GregoryTM, through which we target the demanding requirements of core climbers and skiers, more general outdoor performance enthusiasts and consumers interested in outdoor-inspired gear for their urban activities. Our Black Diamond® and GregoryTM brands are iconic in the active outdoor industry and are linked intrinsically with the modern history of the sports we serve. We believe our brands are synonymous with performance, innovation, durability and safety that the climbing, mountaineering, skiing and backpacking communities rely on and embrace in their active lifestyle.
Critical Accounting Policies and Use of Estimates
Management’s discussion of financial condition and results of operations is based on the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates and assumptions including those related to derivatives, revenue recognition, income taxes, stock-based compensation, and valuation of long-lived assets, goodwill, and other intangible assets. We base our estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.
There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2010.
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, 2011March 31, 2012 Compared to Consolidated Three Months Ended September 30, 2010
The following presents a discussion of consolidated operations for the three months ended September 30, 2011,March 31, 2012, compared with the consolidated three months ended September 30, 2010.
THREE MONTHS ENDED | ||||||||
September 30, 2011 | September 30, 2010 | |||||||
Sales | ||||||||
Domestic sales | $ | 15,868 | $ | 14,056 | ||||
International sales | 26,172 | 19,890 | ||||||
Total sales | 42,040 | 33,946 | ||||||
Cost of goods sold | 26,043 | 24,411 | ||||||
Gross profit | 15,997 | 9,535 | ||||||
Operating expenses | ||||||||
Selling, general and administrative | 12,824 | 10,764 | ||||||
Restructuring charge | 219 | 772 | ||||||
Merger and integration | - | 88 | ||||||
Transaction costs | - | 313 | ||||||
Total operating expenses | 13,043 | 11,937 | ||||||
Operating income (loss) | 2,954 | (2,402 | ) | |||||
Other (expense) income | ||||||||
Interest expense | (720 | ) | (644 | ) | ||||
Interest income | 5 | 6 | ||||||
Other, net | (702 | ) | (1,586 | ) | ||||
Total other expense, net | (1,417 | ) | (2,224 | ) | ||||
Income (loss) before income tax | 1,537 | (4,626 | ) | |||||
Income tax provision (benefit) | 530 | (1,332 | ) | |||||
Net income (loss) | $ | 1,007 | $ | (3,294 | ) |
THREE MONTHS ENDED | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Sales | ||||||||
Domestic sales | $ | 18,815 | $ | 15,830 | ||||
International sales | 27,604 | 23,228 | ||||||
Total sales | 46,419 | 39,058 | ||||||
Cost of goods sold | 27,803 | 23,987 | ||||||
Gross profit | 18,616 | 15,071 | ||||||
Operating expenses | ||||||||
Selling, general and administrative | 13,775 | 12,329 | ||||||
Restructuring charge | - | 774 | ||||||
Transaction costs | 112 | - | ||||||
Total operating expenses | 13,887 | 13,103 | ||||||
Operating income | 4,729 | 1,968 | ||||||
Other (expense) income | ||||||||
Interest expense | (742 | ) | (728 | ) | ||||
Interest income | 12 | 10 | ||||||
Other, net | 290 | 418 | ||||||
Total other expense, net | (440 | ) | (300 | ) | ||||
Income before income tax | 4,289 | 1,668 | ||||||
Income tax expense | 1,699 | 500 | ||||||
Net income | $ | 2,590 | $ | 1,168 |
Sales
Consolidated sales increased $8,094,$7,361, or 23.8%18.8%, to $42,040$46,419 during the three months ended September 30, 2011March 31, 2012 compared to consolidated sales of $33,946$39,058 during the three months ended September 30, 2010.March 31, 2011. The increase in sales was primarily attributable to an increase in the quantity and average sales price per unit of new and existing general mountain products sold during the period of $6,696, as well as an increase inperiod. There was no meaningful impact on sales of $1,398 due to the strengtheningmovement of foreign currencies against the USU.S. dollar.
Consolidated domestic sales increased $1,812,$2,985, or 12.9%18.9%, to $15,868$18,815 during the three months ended September 30, 2011March 31, 2012 compared to consolidated domestic sales of $14,056$15,830 during the three months ended September 30, 2010.March 31, 2011. The increase in domestic sales was primarily attributable to an increase in the quantity of new and existing climbing protection and general mountain products sold during the period.
Consolidated international sales increased $6,282,$4,376, or 31.6%18.8%, to $26,172$27,604 during the three months ended September 30, 2011March 31, 2012 compared to consolidated international sales of $19,890$23,228 during the three months ended September 30, 2010.March 31, 2011. The increase in international sales was primarily attributable to an increase in the quantityaverage sales price per unit of new and existing climbing protection and general mountain products sold during the period of $4,884, as well as increase in internationalperiod. There was no meaningful impact on sales of $1,398 due to the strengtheningmovement of foreign currencies against the USU.S. dollar.
BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)
Cost of Goods Sold
Consolidated cost of goods sold increased $1,632,$3,816, or 6.7%15.9%, to $26,043$27,803 during the three months ended September 30, 2011March 31, 2012 compared to consolidated cost of goods sold of $24,411$23,987 during the three months ended September 30, 2010. The amount recorded during the three months ended September 30, 2010 included an increase in inventory value sold of $3,158 due to the step-up in fair value in purchase accounting; which all inventory acquired, and related step-up in fair value in purchase accounting, was sold in 2010.March 31, 2011. The increase in cost of goods sold was also attributable to an increase in sales.
Gross Profit
Consolidated gross profit increased $6,462,$3,545, or 67.8%23.5%, to $15,997$18,616 during the three months ended September 30, 2011March 31, 2012 compared to consolidated gross profit of $9,535$15,071 during the three months ended September 30, 2010.March 31, 2011. Consolidated gross margin was 38.1%40.1% during the three months ended September 30, 2011March 31, 2012 compared to a consolidated gross margin of 28.1%38.6% during the three months ended September 30, 2010. Excluding the $3,158 impact of the acquisition-related fair value adjustment on sold inventory, gross margin for the three month period ending September 30, 2010 would have been 37.4%. The dollar increase in gross profit was primarily attributable to an increase in sales.March 31, 2011. The increase in gross margin percentage iswas primarily driven by not being impacted by any acquisition-related fair value adjustments during the three months ended September 30, 2011. When compared to the adjusted gross margin of 37.4%, the current period gross margin percentage increased due to the mix of product sold and distribution channel in which it was sold and in part to better operating leverage in the business during 20112012 compared to 2010.
Selling, General and Administrative
Consolidated selling, general and administrative expenses increased $2,060,$1,446, or 19.1%11.7%, to $12,824$13,775 during the three months ended September 30, 2011March 31, 2012 compared to consolidated selling, general and administrative expenses of $10,764$12,329 during the three months ended September 30, 2010.March 31, 2011. The increase in selling, general and administrative expenses was primarily attributable to the Company’s investments in its strategic initiatives and infrastructure to support both current and anticipated future growth.
Restructuring Charge
Consolidated restructuring expenses decreased $553, or 71.6%,100% to $219$0 during the three months ended September 30, 2011March 31, 2012 compared to consolidated restructuring expense of $772$774 during the same period in 2010.2011. The restructuring expenses incurred during the three months ended September 30,March 31, 2011 relate to termination costs of GMP’s office lease in Sacramento, CA. The restructuring expenses incurred during the three months ended September 30, 2010 comprised of: (i) $107 related to severance and relocation benefits provided to GMP employees, (ii) $218 related to the release of the Company from its lease obligations and indemnifications by Kanders & Company, Inc. (“Kanders & Company”) in connection with the relocation of our corporate office from Stamford, Connecticut to Salt Lake City, Utah, and (iii) $447 relating to the amortization of the $1,061 paid for severance and transition service expenses pursuant to a transition services agreement between the Company and Kanders & Company.
NINE MONTHS | NINE MONTHS | FIVE MONTHS | NINE MONTHS | |||||||||||||
ENDED | ENDED | ENDED | ENDED | |||||||||||||
Predecessor | ||||||||||||||||
Consolidated | Company | Combined | ||||||||||||||
September 30, 2011 | September 30, 2010 | May 28, 2010 | September 30, 2010 | |||||||||||||
Sales | ||||||||||||||||
Domestic sales | $ | 44,670 | $ | 18,092 | $ | 15,751 | $ | 33,843 | ||||||||
International sales | 64,766 | 23,598 | 19,192 | 42,790 | ||||||||||||
Total sales | 109,436 | 41,690 | 34,943 | 76,633 | ||||||||||||
Cost of goods sold | 67,333 | 30,347 | 21,165 | 51,512 | ||||||||||||
Gross profit | 42,103 | 11,343 | 13,778 | 25,121 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 37,084 | 18,963 | 12,138 | 31,101 | ||||||||||||
Restructuring charge | 993 | 2,149 | - | 2,149 | ||||||||||||
Merger and integration | - | 868 | - | 868 | ||||||||||||
Transaction costs | - | 5,075 | - | 5,075 | ||||||||||||
Total operating expenses | 38,077 | 27,055 | 12,138 | 39,193 | ||||||||||||
Operating income (loss) | 4,026 | (15,712 | ) | 1,640 | (14,072 | ) | ||||||||||
Other (expense) income | ||||||||||||||||
Interest expense | (2,157 | ) | (980 | ) | (165 | ) | (1,145 | ) | ||||||||
Interest income | 31 | 45 | 3 | 48 | ||||||||||||
Other, net | 145 | (1,474 | ) | 1,803 | 329 | |||||||||||
Total other (expense) income, net | (1,981 | ) | (2,409 | ) | 1,641 | (768 | ) | |||||||||
Income (loss) before income tax | 2,045 | (18,121 | ) | 3,281 | (14,840 | ) | ||||||||||
Income tax provision (benefit) | 681 | (69,765 | ) | 966 | (68,799 | ) | ||||||||||
Net income | $ | 1,364 | $ | 51,644 | $ | 2,315 | $ | 53,959 |
Transaction Costs
Consolidated merger and integration expenses decreasedtransaction expense increased 100.0% to $0$112 during the ninethree months ended September 30, 2011March 31, 2012 compared to combined merger and integration expensesconsolidated transaction expense of $868$0 during the same period in 2010, which was attributable to transaction bonuses and consulting fees paid in connection with the acquisition of BDEL and GMP.
Interest Expense
Consolidated interest expense increased $1,012,$14, or 88.4%1.9%, to $2,157$742 during the ninethree months ended September 30, 2011March 31, 2012 compared to combinedconsolidated interest expense of $1,145$728 during the ninethree months ended September 30, 2010.March 31, 2011. The increase in interest expense was primarily attributable to new debt outstanding related to financing of the acquisitions of BDEL and GMP and higher average balances outstanding on the Company’s line of credit during the ninethree months ended September 30, 2011March 31, 2012 compared to the same period in 2010.
Income Tax Expense
Consolidated income tax expense increased $69,480,$1,199, or 101.0%239.8%, to an$1,699 during the three months ended March 31, 2012 compared to a consolidated income tax expense of $681$500 during the ninesame period in 2011. The increase in tax expense due to the increase in pre-tax income and effective income tax rate recorded during the three months ended September 30, 2011 compared to combined income tax benefit of $68,799 during the nine months ended September 30, 2010. The decrease in tax benefit of $69,480 is due primarily to the realization of $65,000 of the Company’s deferred tax asset as well as a $4,480 benefit for period losses during the nine months ended September 30, 2010.
Our effective income tax rate was 33.3%39.6% for the ninethree months ended September 30, 2011March 31, 2012 compared to 463.6%30.0% for the same period in 2010.2011. 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.
BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)
Liquidity and Capital Resources
Consolidated NineThree Months Ended September 30, 2011March 31, 2012 Compared to Combined NineConsolidated Three Months Ended September 30, 2010
The following presents a discussion of cash flows for the consolidated ninethree months ended September 30, 2011,March 31, 2012, compared with the combined nineconsolidated three months ended September 30, 2010. The combined nine months ended September 30, 2010 represents the results of the Company for the nine months ended September 30, 2010, and the results of the Predecessor for the period from January 1, 2010 through May 28, 2010, the closing date of the Mergers. The Predecessor does not include GMP. Management believes this combined presentation of the Company and Predecessor cash flows is the most useful comparison between periods.
NINE MONTHS | NINE MONTHS | FIVE MONTHS | NINE MONTHS | |||||||||||||
ENDED | ENDED | ENDED | ENDED | |||||||||||||
September 30, 2011 | September 30, 2010 | Predecessor Company May 28, 2010 | Combined September 30, 2010 | |||||||||||||
Net cash provided by (used in) operating activities | $ | (8,883 | ) | $ | (20,629 | ) | $ | 7,412 | $ | (13,217 | ) | |||||
Net cash used in investing activities | (2,457 | ) | (59,262 | ) | (788 | ) | (60,050 | ) | ||||||||
Net cash provided by (used in) financing activities | 10,105 | 23,006 | (6,261 | ) | 16,745 | |||||||||||
Effect of foreign exchange rates on cash | 145 | 114 | (60 | ) | 54 | |||||||||||
Change in cash and cash equivalents | (1,090 | ) | (56,771 | ) | 303 | (56,468 | ) | |||||||||
Cash and cash equivalents, beginning of period | 2,767 | 58,363 | 1,317 | 59,680 | ||||||||||||
Cash and cash equivalents, end of period | $ | 1,677 | $ | 1,592 | $ | 1,620 | $ | 3,212 |
THREE MONTHS ENDED | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Net cash provided by operating activities | $ | 519 | $ | 413 | ||||
Net cash used in investing activities | (1,606 | ) | (1,464 | ) | ||||
Net cash provided by financing activities | 40,279 | 3,499 | ||||||
Effect of foreign exchange rates on cash | 52 | 17 | ||||||
Change in cash and cash equivalents | 39,244 | 2,465 | ||||||
Cash and cash equivalents, beginning of period | 2,400 | 2,767 | ||||||
Cash and cash equivalents, end of period | $ | 41,644 | $ | 5,232 |
Net Cash Used InFrom Operating Activities
Consolidated net cash used inprovided by operating activities was $8,883$519 during the ninethree months ended September 30, 2011March 31, 2012 compared to combinedconsolidated net cash used inprovided by operating activities of $13,217$413 during the ninethree months ended September 30, 2010.March 31, 2011. The decreaseincrease in net cash used inprovided operating activities during 20112012 is primarily due to not incurring $5,075 of transaction expenses, $1,682 in cash related restructuring activities, and $868 in merger in integration charges related to the acquisitions of BDEL and GMP. The decrease in cash flows used resulting from not incurring the before mentioned cash outflows,increased profitability, which was partially off-set by timing differences of when accounts receivable were collected, inventory purchased, and accounts payable were paid during the ninethree months ended September 30, 2011March 31, 2012 compared to the same period in 2010.
Free cash flow, defined as net cash provided by operating activities less capital expenditures, was free cash flows used of $11,370$(1,087) during the ninethree months ended September 30, 2011March 31, 2012 compared to free cash flows used of $14,766$(1,051) during the same period in 2010.
Net Cash Used InFrom Investing Activities
Consolidated net cash used in investing activities decreasedincreased by $57,593$142 to $2,457$1,606 during the ninethree months ended September 30, 2011March 31, 2012 compared to combined $60,050consolidated $1,464 during the ninethree months ended September 30, 2010.March 31, 2011. The decreaseincrease is largely due to the $82,560 used for the acquisitions of BDEL and GMP, net of cash acquired, off-set by the $24,059 net transfer of marketable securities to cash to fund the mergersincrease in 2010, which activity did not take place in 2011. Additionally, consolidated capital expenditures increased $938 to $2,487 during the nine months ended September 30, 2011 compared to combined capital expenditures of $1,549 during the nine months ended September 30, 2010.expenditures. The increase in capital expenditures is due to certain building renovations at the Company’s headquartersmachinery and new distribution center in Salt Lake City, UT as part of fully integrating GMPequipment and computer hardware and software capital expenditures that were incurred during the ninethree months ended September 30, 2011March 31, 2012 that were not incurred during the same period in 2010.
Net Cash Provided ByFrom Financing Activities
Consolidated net cash provided by financing activities decreasedincreased by $6,640$36,780 to $10,105$40,279 during the ninethree months ended September 30, 2011March 31, 2012 compared to combinedconsolidated cash provided by financing activities of $16,745$3,499 during the ninethree months ended September 30, 2010.March 31, 2011. The decreaseincrease is due to the change inproceeds from the sale of stock and proceeds from exercise of stock options $62,634 and $30, respectively, which was partially off-set by net payments on the line of credit of $(22,385) compared to net borrowings on the line of credit of $2,883, which was used$3,499 during the same period in 2011. On February 22, 2012, the Company closed a public offering for 8,913 shares of its common stock, realizing net proceeds of $63,400 before expenses. On February 22, 2012, the Company reduced its outstanding balance on its revolving credit facility with Zions First National Bank to finance working capital needs and a portion$0, leaving $35,000 of the acquisition price, as well as a decrease in stock subscription proceeds and the exerciseavailable capacity less outstanding letters of stock options of $3,757.
BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)
Net Operating Loss
As of December 31, 2010,2011, the Company had net operating loss, research and experimentation credit and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $226,837, $1,501$217,822 ($725 relates to tax windfall, which will not be realized until an income tax payable exists), $1,693 and $56,$261, respectively. The Company's ability to benefit from certain net operating loss and tax credit carryforwards is limited by $1,051 under Section 382 of the Internal Revenue Code, as amended (the “Code”), due to a prior ownership change of greater than 50%. The Company believes it’s more likely than not that 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 FF. income and will be offset with the NOL. Of the $225,786$217,097 of NOLsnet operating losses available to offset taxable income, $214,160$215,538 does not expire until 2020 or later, subject to compliance with Section 382 of the Code.
As of December 31, 2010,2011, the Company’s gross deferred tax asset was $91,031.$92,251. The Company has recorded a valuation allowance, resulting in a net deferred tax asset of $69,527,$73,747, excluding deferred tax liabilities. Management has provided a valuation allowance against some of the net deferred income tax assets as of December 31, 2010,2011, because the ultimate realization of those benefits and assets does not meet the more likely than not criteria.
Revolving Credit Facility
The Company and certain of its subsidiaries entered intohave a loan agreement effective May 28, 2010 amongwith Zions First National Bank, a national banking association (“Lender”) and the Company and its direct and indirect subsidiaries as co-borrowers (the “Borrowers”) (the “Loan Agreement”). Concurrently with the closing of the acquisition of BDEL, Gregory Mountain Products, LLC, as the surviving company of the GMP Merger, entered into an assumption agreement and became an additional Borrower under the Loan Agreement.
Shelf Registrations
On February 1, 2011, our shelf registration statement on Form S-3 (File No. 333-171164) (the “Form S-3”) filed with the Securities and Exchange Commission was declared effective whereby we may offer, issue and sell from time to time, in one or more offerings and series, together or separately, shares of common stock, shares of preferred stock, debt securities or guarantees of debt securities up to an aggregate amount of $250,000,000.$250,000. The proceeds of any offering are anticipated to be used in the strategic development and growth of our business, both organically and through acquisitions.
On February 22, 2012, we consummated the closing of a public offering (the “Offering”) of 7,750 shares of the Company’s common stock, plus an additional 1,163 shares of common stock to cover an over-allotment option granted to the underwriters, at a price to the public of $7.50 per share (the “Offering Price”). Included in the total number of shares of common stock sold in the Offering were 1,333 shares of common stock purchased at the Offering Price by certain of the Company’s officers, directors and employees (the “Reserved Shares”). The Reserved Shares are subject to lock-up agreements restricting the sales of such shares for a period of 90 days, subject to extension under certain circumstances. The underwriters received an underwriting discount of 6%, or $0.45 per share, in connection with the sale of the shares of common stock in the Offering, other than with respect to the sale of the Reserved Shares, for which the underwriters did not receive any underwriting discount. The underwriters exercised the over-allotment option in full at the closing of the Offering. The net proceeds to the Company from the Offering, before expenses, were approximately $63,400. We intend to use the net proceeds from the common stock offered for general corporate purposes, including repayment of debt, capital expenditures and potential acquisitions. The common stock was offered and sold pursuant to a prospectus dated February 1, 2011, a preliminary prospectus supplement filed with the Securities and Exchange Commission on February 15, 2012 and a prospectus supplement filed with the Securities and Exchange Commission on February 17, 2012, in connection with a takedown from the Company’s Form S-3 declared effective by the Securities Exchange Commission on February 1, 2011. After the Offering, we may offer, issue and sell, from time to time, in one or more offerings and series, together or separately, shares of our common stock, shares of our preferred stock, debt securities or guarantees of debt securities up to an aggregate amount of $183,156 pursuant to the Form S-3.
On August 19, 2011, our shelf registration statement on Form S-4 (File No. 333-175695) filed with the Securities and Exchange Commission was declared effective whereby we may issue an aggregate of 5,750,0005,750 shares of common stock, which may be issued from time to time by the Company in connection with acquisitions by the Company of assets, businesses or securities.
BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
(in thousands, except per share amounts)
Off-Balance Sheet Arrangements
We do not engage in any transactions or have relationships or other arrangements with unconsolidated entities. These include special purpose and similar entities or other off-balance sheet arrangements. We also do not engage in energy, weather or other commodity-based contracts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has not been any material change in the market risk disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2010.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, its principal executive officer and principal financial officer, respectively, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act)Act of 1934, as amended (“Exchange Act”)) as of September 30, 2011,March 31, 2012, pursuant to Exchange Act Rule 13a-15. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the appropriate management on a basis that permits timely decisions regarding disclosure. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2011March 31, 2012 are effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2011March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
BLACK DIAMOND, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Proceedings
The Company is involved in various legal disputes and other legal proceedings that arise from time to time in the ordinary course of business. Based on currently available information, the Company does not believe that it is reasonably possible that the disposition of any of the legal disputes the Company or its subsidiaries is currently involved in will have a material adverse effect upon the Company’s consolidated financial condition, results of operations or cash flows. It is possible that, as additional information becomes available, the impact on the Company of an adverse determination could have a different effect.
Litigation
The Company is involved in various lawsuits arising from time to time that the Company considers ordinary routine litigation incidental to its business. Amounts accrued for litigation matters represent the anticipated costs (damages and/or settlement amounts) in connection with pending litigation and claims and related anticipated legal fees for defending such actions. The costs are accrued when it is both probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are based upon the Company’s assessment, after consultation with counsel (if deemed appropriate), of probable loss based on the facts and circumstances of each case, the legal issues involved, the nature of the claim made, the nature of the damages sought and any relevant information about the plaintiffs and other significant factors that vary by case. When it is not possible to estimate a specific expected cost to be incurred, the Company evaluates the range of probable loss and records the minimum end of the range. Based on current information, the Company believes that the ultimate conclusion of the various pending litigations of the Company, in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Product Liability
As a consumer goods manufacturer and distributor, the Company faces the risk of product liability and related lawsuits involving claims for substantial money damages, product recall actions and higher than anticipated rates of warranty returns or other returns of goods. The Company is therefore vulnerable to various personal injury and property damage lawsuits relating to its products and incidental to its business.
Based on current information, there are no pending product liability claims and lawsuits of the Company, which the Company believes in the aggregate will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.2011.
21 |
BLACK DIAMOND, INC.
ITEM 6. EXHIBITS
Exhibit | Description |
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
BLACK DIAMOND, INC.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
BLACK DIAMOND, INC.
Date: November 1, 2011
/s/ Peter Metcalf
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Peter Metcalf
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Robert Peay
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Robert Peay,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
BLACK DIAMOND, INC.
EXHIBIT INDEX
Exhibit | Description |
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |