UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended:September 30, 2015March 31, 2016
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:001-34767
BLACK DIAMOND, INC.
(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 | 84124 | |
| (Address of principal executive offices) | (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.
Yesx 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).
Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Non-accelerated filer | ¨ | |
| Accelerated filer | x | 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¨ Nox
As of November 2, 2015,April 27, 2016, there were 32,787,67130,847,056 shares of common stock, par value $0.0001, outstanding.
INDEX
BLACK DIAMOND, INC.
2
| 2 |
| BLACK DIAMOND, INC. |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| (Unaudited) |
| (In thousands, except per share amounts) |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
| September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash | $ | 26,273 | $ | 29,788 | $ | 86,335 | $ | 88,401 | ||||||||
| Marketable securities | 9,235 | 9,902 | 9,910 | 9,824 | ||||||||||||
| Accounts receivable, less allowance for doubtful accounts of $250 and $461, respectively | 30,115 | 27,754 | ||||||||||||||
| Accounts receivable, less allowance for doubtful accounts of $396 and $184, respectively | 27,014 | 26,774 | ||||||||||||||
| Inventories | 54,280 | 56,789 | 46,186 | 51,496 | ||||||||||||
| Prepaid and other current assets | 4,956 | 5,274 | 3,225 | 3,337 | ||||||||||||
| Income tax receivable | 1,786 | 5,323 | 2,534 | 2,550 | ||||||||||||
| Deferred income taxes | 2 | 2,482 | ||||||||||||||
| Assets held for sale | 60,105 | 21,248 | ||||||||||||||
| Total current assets | 186,752 | 158,560 | 175,204 | 182,382 | ||||||||||||
| Property and equipment, net | 11,626 | 12,235 | 10,842 | 10,790 | ||||||||||||
| Other intangible assets, net | 11,296 | 12,558 | 10,786 | 10,934 | ||||||||||||
| Indefinite lived intangible assets | 22,738 | 22,993 | 22,770 | 22,644 | ||||||||||||
| Goodwill | 29,327 | 29,628 | ||||||||||||||
| Deferred income taxes | 41 | 37,904 | ||||||||||||||
| Other long-term assets | 2,276 | 2,732 | 1,865 | 1,843 | ||||||||||||
| Non-current assets held for sale | - | 38,930 | ||||||||||||||
| Total assets | $ | 264,056 | $ | 315,540 | $ | 221,467 | $ | 228,593 | ||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | 21,576 | $ | 24,672 | $ | 19,412 | $ | 21,446 | ||||||||
| Deferred income taxes | 77 | 26 | ||||||||||||||
| Liabilities held for sale | 16,734 | 7,842 | ||||||||||||||
| Current portion of long-term debt | 110 | - | ||||||||||||||
| Total current liabilities | 38,387 | 32,540 | 19,522 | 21,446 | ||||||||||||
| Long-term debt | 19,731 | 18,559 | ||||||||||||||
| Long-term debt, net | 20,447 | 20,133 | ||||||||||||||
| Deferred income taxes | 5,973 | - | 8,861 | 8,969 | ||||||||||||
| Other long-term liabilities | 2,412 | 2,142 | 2,069 | 2,042 | ||||||||||||
| Non-current liabilities held for sale | - | 5,106 | ||||||||||||||
| Total liabilities | 66,503 | 58,347 | 50,899 | 52,590 | ||||||||||||
| Stockholders' Equity | ||||||||||||||||
| Preferred stock, $.0001 par value; 5,000 shares authorized; none issued | - | - | - | - | ||||||||||||
| Common stock, $.0001 par value; 100,000 shares authorized; 32,884 and 32,801 issued and 32,788 and 32,704 outstanding | 3 | 3 | ||||||||||||||
| Common stock, $.0001 par value; 100,000 shares authorized; 32,884 and 32,884 issued and 30,843 and 31,203 outstanding | 3 | 3 | ||||||||||||||
| Additional paid in capital | 484,478 | 482,985 | 483,734 | 483,698 | ||||||||||||
| Accumulated deficit | (278,438 | ) | (223,197 | ) | (303,181 | ) | (299,168 | ) | ||||||||
| Treasury stock, at cost | (186 | ) | (186 | ) | (8,838 | ) | (7,320 | ) | ||||||||
| Accumulated other comprehensive loss | (8,304 | ) | (2,412 | ) | (1,150 | ) | (1,210 | ) | ||||||||
| Total stockholders' equity | 197,553 | 257,193 | 170,568 | 176,003 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 264,056 | $ | 315,540 | $ | 221,467 | $ | 228,593 | ||||||||
See accompanying notes to condensed consolidated financial statements.
3
| 3 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended | ||||||||
| September 30, 2015 | September 30, 2014 | |||||||
| Sales | ||||||||
| Domestic sales | $ | 17,185 | $ | 17,640 | ||||
| International sales | 22,071 | 26,430 | ||||||
| Total sales | 39,256 | 44,070 | ||||||
| Cost of goods sold | 25,113 | 26,728 | ||||||
| Gross profit | 14,143 | 17,342 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative | 14,243 | 15,945 | ||||||
| Restructuring charge | 696 | 2,180 | ||||||
| Transaction costs | 39 | - | ||||||
| Total operating expenses | 14,978 | 18,125 | ||||||
| Operating loss | (835 | ) | (783 | ) | ||||
| Other (expense) income | ||||||||
| Interest expense, net | (705 | ) | (650 | ) | ||||
| Other, net | 696 | (774 | ) | |||||
| Total other expense, net | (9 | ) | (1,424 | ) | ||||
| Loss before income tax | (844 | ) | (2,207 | ) | ||||
| Income tax expense (benefit) | 48,382 | (1,045 | ) | |||||
| Loss from continuing operations | (49,226 | ) | (1,162 | ) | ||||
| Discontinued operations, net of tax | 1,107 | 21,565 | ||||||
| Net (loss) income | (48,119 | ) | 20,403 | |||||
| Other comprehensive loss, net of tax: | ||||||||
| Unrealized loss on marketable securities | (439 | ) | - | |||||
| Foreign currency translation adjustment | (1,063 | ) | (5,026 | ) | ||||
| Unrealized (loss) income on hedging activities | (932 | ) | 1,651 | |||||
| Other comprehensive loss | (2,434 | ) | (3,375 | ) | ||||
| Comprehensive (loss) income | $ | (50,553 | ) | $ | 17,028 | |||
| Loss from continuing operations per share: | ||||||||
| Basic | $ | (1.50 | ) | $ | (0.04 | ) | ||
| Diluted | (1.50 | ) | (0.04 | ) | ||||
| Net (loss) income per share: | ||||||||
| Basic | $ | (1.47 | ) | $ | 0.63 | |||
| Diluted | (1.47 | ) | 0.63 | |||||
| Weighted average shares outstanding: | ||||||||
| Basic | 32,776 | 32,585 | ||||||
| Diluted | 32,776 | 32,585 | ||||||
| BLACK DIAMOND, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS |
| (Unaudited) |
| (In thousands, except per share amounts) |
| Three Months Ended | ||||||||
| March 31, 2016 | March 31, 2015 | |||||||
| Sales | ||||||||
| Domestic sales | $ | 19,617 | $ | 18,323 | ||||
| International sales | 18,590 | 23,558 | ||||||
| Total sales | 38,207 | 41,881 | ||||||
| Cost of goods sold | 27,253 | 27,060 | ||||||
| Gross profit | 10,954 | 14,821 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative | 14,229 | 15,085 | ||||||
| Restructuring charge | 462 | 468 | ||||||
| Transaction costs | 136 | 164 | ||||||
| Total operating expenses | 14,827 | 15,717 | ||||||
| Operating loss | (3,873 | ) | (896 | ) | ||||
| Other (expense) income | ||||||||
| Interest expense, net | (714 | ) | (686 | ) | ||||
| Other, net | 436 | (477 | ) | |||||
| Total other expense, net | (278 | ) | (1,163 | ) | ||||
| Loss from continuing operations before income tax | (4,151 | ) | (2,059 | ) | ||||
| Income tax benefit | (138 | ) | (314 | ) | ||||
| Loss from continuing operations | (4,013 | ) | (1,745 | ) | ||||
| Discontinued operations, net of tax | - | 70 | ||||||
| Net loss | (4,013 | ) | (1,675 | ) | ||||
| Other comprehensive income (loss), net of tax: | ||||||||
| Unrealized income on marketable securities | 86 | 27 | ||||||
| Foreign currency translation adjustment | 686 | (5,639 | ) | |||||
| Unrealized (loss) income on hedging activities | (712 | ) | 1,253 | |||||
| Other comprehensive income (loss) | 60 | (4,359 | ) | |||||
| Comprehensive loss | $ | (3,953 | ) | $ | (6,034 | ) | ||
| Loss from continuing operations per share: | ||||||||
| Basic | $ | (0.13 | ) | $ | (0.05 | ) | ||
| Diluted | (0.13 | ) | (0.05 | ) | ||||
| Net loss per share: | ||||||||
| Basic | $ | (0.13 | ) | $ | (0.05 | ) | ||
| Diluted | (0.13 | ) | (0.05 | ) | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | 30,899 | 32,704 | ||||||
| Diluted | 30,899 | 32,704 | ||||||
See accompanying notes to condensed consolidated financial statements.
4
| 4 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In thousands, except per share amounts)
| Nine Months Ended | ||||||||
| September 30, 2015 | September 30, 2014 | |||||||
| Sales | ||||||||
| Domestic sales | $ | 51,992 | $ | 46,176 | ||||
| International sales | 59,198 | 66,168 | ||||||
| Total sales | 111,190 | 112,344 | ||||||
| Cost of goods sold | 71,711 | 70,834 | ||||||
| Gross profit | 39,479 | 41,510 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative | 43,470 | 46,488 | ||||||
| Restructuring charge | 2,572 | 2,590 | ||||||
| Transaction costs | 446 | - | ||||||
| Total operating expenses | 46,488 | 49,078 | ||||||
| Operating loss | (7,009 | ) | (7,568 | ) | ||||
| Other (expense) income | ||||||||
| Interest expense, net | (2,073 | ) | (1,808 | ) | ||||
| Other, net | 346 | (626 | ) | |||||
| Total other expense, net | (1,727 | ) | (2,434 | ) | ||||
| Loss before income tax | (8,736 | ) | (10,002 | ) | ||||
| Income tax expense (benefit) | 46,075 | (3,503 | ) | |||||
| Loss from continuing operations | (54,811 | ) | (6,499 | ) | ||||
| Discontinued operations, net of tax | (430 | ) | 20,592 | |||||
| Net (loss) income | (55,241 | ) | 14,093 | |||||
| Other comprehensive loss, net of tax: | ||||||||
| Unrealized loss on marketable securities | (424 | ) | - | |||||
| Foreign currency translation adjustment | (4,647 | ) | (7,209 | ) | ||||
| Unrealized (loss) income on hedging activities | (821 | ) | 1,783 | |||||
| Other comprehensive loss | (5,892 | ) | (5,426 | ) | ||||
| Comprehensive (loss) income | $ | (61,133 | ) | $ | 8,667 | |||
| Loss from continuing operations per share: | ||||||||
| Basic | $ | (1.67 | ) | $ | (0.20 | ) | ||
| Diluted | (1.67 | ) | (0.20 | ) | ||||
| Net (loss) income per share: | ||||||||
| Basic | $ | (1.69 | ) | $ | 0.43 | |||
| Diluted | (1.69 | ) | 0.43 | |||||
| Weighted average shares outstanding: | ||||||||
| Basic | 32,735 | 32,525 | ||||||
| Diluted | 32,735 | 32,525 | ||||||
| BLACK DIAMOND, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| (In thousands) |
| Three Months Ended | ||||||||
| March 31, 2016 | March 31, 2015 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (4,013 | ) | $ | (1,675 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation of property and equipment | 618 | 921 | ||||||
| Amortization of intangible assets | 269 | 655 | ||||||
| Accretion of notes payable | 437 | 364 | ||||||
| Gain on disposition of assets | (3 | ) | (9 | ) | ||||
| Gain from removal of accumulated translation adjustment | (22 | ) | - | |||||
| Stock-based compensation | 36 | 463 | ||||||
| Deferred income taxes | (137 | ) | (219 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (24 | ) | 2,794 | |||||
| Inventories | 5,602 | 3,780 | ||||||
| Prepaid and other assets | (572 | ) | (1,997 | ) | ||||
| Accounts payable and accrued liabilities | (1,190 | ) | (7,574 | ) | ||||
| Income taxes | 16 | (221 | ) | |||||
| Other | 14 | (255 | ) | |||||
| Net cash provided by (used in) operating activities | 1,031 | (2,973 | ) | |||||
| Cash Flows From Investing Activities: | ||||||||
| Payments related to the sale of POC | (921 | ) | - | |||||
| Proceeds from disposition of property and equipment | 18 | 70 | ||||||
| Purchase of property and equipment | (603 | ) | (734 | ) | ||||
| Net cash used in investing activities | (1,506 | ) | (664 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Net proceeds from (repayments of) revolving credit facilities | - | (539 | ) | |||||
| Repayments of long-term debt | - | (7 | ) | |||||
| Proceeds from issuance of long-term debt | - | 44 | ||||||
| Purchase of treasury stock | (1,662 | ) | - | |||||
| Proceeds from exercise of stock options | - | 51 | ||||||
| Net cash used in financing activities | (1,662 | ) | (451 | ) | ||||
| Effect of foreign exchange rates on cash | 71 | (103 | ) | |||||
| Change in cash | (2,066 | ) | (4,191 | ) | ||||
| Cash, beginning of period | 88,401 | 31,034 | ||||||
| Cash, end of period | $ | 86,335 | $ | 26,843 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash (received) paid for income taxes | $ | (16 | ) | $ | 231 | |||
| Cash paid for interest | $ | 327 | $ | 330 | ||||
| Supplemental Disclosures of Non-Cash Investing and Financing Activities: | ||||||||
| Property and equipment purchased with accounts payable | $ | 58 | $ | 323 | ||||
See accompanying notes to condensed consolidated financial statements.
5
| 5 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended | ||||||||
| September 30, 2015 | September 30, 2014 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net (loss) income | $ | (55,241 | ) | $ | 14,093 | |||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation of property and equipment | 2,730 | 3,357 | ||||||
| Amortization of intangible assets | 1,829 | 2,495 | ||||||
| Impairment of long-lived assets | - | 2,028 | ||||||
| Gain on sale of discontinued operation | - | (39,491 | ) | |||||
| Accretion of notes payable | 1,133 | 985 | ||||||
| Loss on disposition of assets | 55 | 18 | ||||||
| Gain from removal of accumulated translation adjustment | (606 | ) | - | |||||
| Stock-based compensation | 1,229 | 1,387 | ||||||
| Deferred income taxes | 47,139 | 15,161 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (678 | ) | (12,312 | ) | ||||
| Inventories | (3,674 | ) | (24,962 | ) | ||||
| Prepaid and other current assets | (669 | ) | 1,846 | |||||
| Accounts payable and accrued liabilities | (1,519 | ) | 2,988 | |||||
| Income taxes | 3,774 | - | ||||||
| Other | (397 | ) | 1,407 | |||||
| Net cash used in operating activities | (4,895 | ) | (31,000 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Proceeds from the sale of Gregory Mountain Products | - | 81,140 | ||||||
| Proceeds from disposition of property and equipment | 276 | 4 | ||||||
| Purchase of property and equipment | (2,314 | ) | (2,399 | ) | ||||
| Net cash (used in) provided by investing activities | (2,038 | ) | 78,745 | |||||
| Cash Flows From Financing Activities: | ||||||||
| Net proceeds from (repayments of) revolving credit facilities | 2,276 | (3,125 | ) | |||||
| Repayments of long-term debt | (21 | ) | (9,438 | ) | ||||
| Proceeds from issuance of long-term debt | 44 | - | ||||||
| Purchase of treasury stock | - | (184 | ) | |||||
| Proceeds from exercise of stock options | 264 | 1,303 | ||||||
| Excess tax benefits from share-based payment arrangements | - | 1,701 | ||||||
| Net cash provided by (used in) financing activities | 2,563 | (9,743 | ) | |||||
| Effect of foreign exchange rates on cash | (136 | ) | 313 | |||||
| Change in cash | (4,506 | ) | 38,315 | |||||
| Cash, beginning of period | 31,034 | 4,478 | ||||||
| Cash, end of period | $ | 26,528 | $ | 42,793 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash (received) paid for income taxes | $ | (5,217 | ) | $ | 450 | |||
| Cash paid for interest | $ | 1,010 | $ | 1,700 | ||||
| Supplemental Disclosures of Non-Cash Investing and Financing Activities: | ||||||||
| Property and equipment purchased with accounts payable | $ | 280 | $ | 120 | ||||
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of Black Diamond, Inc. and subsidiaries (“Black Diamond” or the “Company,” which(which may be referred to as the “Company,” “we,” “us” or “our”) as of and for the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), 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 only of normal recurring adjustments, except otherwise disclossed)disclosed) 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, 2015March 31, 2016 are not necessarily indicative of the results to be obtained for the year ending December 31, 2015.2016. 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, 2014,2015, filed with the Securities and Exchange Commission (the “Commission”).
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, LLC (which may be referred to as “Gregory Mountain Products”, “Gregory” or “GMP”). 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”).
On July 23, 2014, the Company and Gregory Mountain Products, LLC (“Gregory” or “GMP”), its then wholly-owned subsidiary, completed the sale of certain assets to Samsonite LLC (“Samsonite”) comprising Gregory’s business of designing, manufacturing, marketing, distributing and selling technical, alpine, backpacking, hiking, mountaineering and active trail products and accessories as well as outdoor-inspired lifestyle bags (the “Business”“Gregory Business”) pursuant to the terms of that certain Asset Purchase Agreement (the “GMP Purchase Agreement”), dated as of June 18, 2014, by and among the Company, Gregory and Samsonite. Under the terms of the GMP Purchase Agreement, Samsonite paid $84,135 in cash for Gregory’s assets comprising the Gregory Business and assumed certain specified liabilities (the “GMP Sale”). The activities of Gregory have been segregated and reported as discontinued operations for all periods presented. See Note 2. Discontinued Operations to the notes to the unaudited condensed consolidated financial statements.
On October 7, 2015, the Company and the Company’s wholly owned subsidiary, Ember Scandinavia AB (“Ember”), sold (“POC Disposition”) their respective equity interests in POC USA, LLC and POC Sweden AB (collectively, “POC”) comprising POC’s business of designing, manufacturing, marketing, distributing and selling advanced-design helmets, body armor, goggles, eyewear, gloves, and apparel for action or “gravity sports,” such as skiing, snowboarding, and cycling pursuant to a Purchase Agreement (the “POC Purchase Agreement”) dated as of October 7, 2015, by and among the Company and Ember, as sellers, and Dainese S.p.A. and Dainese U.S.A., Inc. (collectively “Dainese”), as purchasers. Under the terms of the POC Purchase Agreement, Dainese paid $65,000 in cash (before purchase price adjustments of $(440) relating to net working capital and net debt) for the POC Disposition. The assets and liabilities of POC have been segregated and reported as held for sale as of September 30, 2015 and December 31, 2014. Furthermore, the activities of POC have been segregated and reported as discontinued operations for all periods presented. See Note 2. Discontinued Operations to the notes to the unaudited condensed consolidated financial statements.
Nature of Business
Black Diamond is a global leader in designing, manufacturing and marketing innovative active outdoor performance equipment and apparel for climbing, mountaineering, backpacking, skiing, and a wide range of other year-round outdoor recreation activities. Our principal brands include Black Diamond® and PIEPS™ and are targeted not only to the demanding requirements of core climbers and skiers, 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® and PIEPS™ brands are iconic in the active outdoor industry and linked intrinsically with the modern history of these sports. 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.
On March 16, 2015, the Company announced that it engaged Rothschild Inc. and Robert W. Baird & Co., Incorporated as financial advisors to lead an exploration of a full range of strategic alternatives, including a sale of the entire Company and the potential sales of the Company’s Black Diamond Equipment (including PIEPS) and POC brands in two separate transactions.
On October 7, 2015, the Company and the Company’s wholly owned subsidiary, Ember Scandinavia AB (“Ember”), sold their respective equity interests in POC comprising POC’s business of designing, manufacturing, marketing, distributing and selling advanced-design helmets, body armor, goggles, eyewear, gloves, and apparel for action or “gravity sports,” such as skiing, snowboarding, and cycling pursuant to a Purchase Agreement (the “POC Purchase Agreement”), dated as of October 7, 2015, by and among the Company and Ember, as sellers, and Dainese S.p.A. and Dainese U.S.A., Inc. (collectively “Dainese”), as purchasers. Under the terms of the POC Purchase Agreement, Dainese paid $63,639 in cash for POC (the “POC Disposition”). Furthermore, the activities of POC have been segregated and reported as discontinued operations for all periods presented. See Note 2. Discontinued Operations to the notes to condensed consolidated financial statements.
On October 8, 2015, the Company announced the completion of the POC Disposition resulting in the conclusion of the Company’s review of strategic alternatives.
On November 9, 2015, the Company announced that it has engaged Rothschild Inc. as a financial advisor to assist the Company to seek to redeploy our significant cash balances to invest in high-quality, durable, cash flow-producing assets potentially unrelated to the outdoor industry in order to diversify our business and potentially monetize our substantial net operating losses as part of our asset redeployment and diversification strategy. We intend to focus our search primarily in the United States, although we will also evaluate international investment opportunities should we find such opportunities attractive.
Nature of Business
Black Diamond, Inc., through its ownership of Black Diamond Equipment, Ltd., is a global leader in designing, manufacturing and marketing innovative active outdoor performance equipment and apparel for climbing, mountaineering, backpacking, skiing, and a wide range of other year-round outdoor recreation activities. Our principal brands include Black Diamond® and PIEPS™ and are targeted not only to the demanding requirements of core climbers, skiers and alpinists, 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® and PIEPS™ brands are iconic in the active outdoor and ski industries, and linked intrinsically with the modern history of these sports. 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.
| 6 |
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
We offer a broad range of products including: high performance apparel (such as jackets, shells, pants and bibs); rock-climbing equipment (such as carabiners, protection devices, harnesses, belay devices, helmets, and ice-climbing gear); technical backpacks and high-end day packs; tents; trekking poles; headlamps and lanterns; and gloves and mittens. We also offer advanced skis, ski poles, ski bindings, ski skins, and ski safety products, including avalanche airbag systems, avalanche transceivers, shovels, and probes.
Use of Estimates
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 liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The more significant estimates relate to derivatives, revenue recognition, income taxes, and valuation of long-lived assets goodwill, and other intangible assets. 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. 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.
7
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
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, 2014.2015. During the ninethree months ended September 30, 2015,March 31, 2016, the Company adopted Accounting Standards Update (“ASU”) 2014-08,ASU 2014-12,Reporting Discontinued Operations and Disclosures of Disposals of ComponentsAccounting for Share-Based Payments When the Terms of an EntityAward Provide That a Performance Target Could Be Achieved after the Requisite Service Period., ASU 2015-01,Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), and ASU 2015-03, Simplifying the Presentation of Debt Issuance Cost. There was not a significant impact on the Company’s condensed consolidated statements and related disclosures due to adoption of these standards.
Accounting Pronouncements Issued Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09,Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, but not before the original effective date (periods beginning after December 15, 2016). The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In June 2014, the FASB issued ASU 2014-12,Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition of the award. A reporting entity should apply existing guidance in Accounting Standards Codification Topic 718,Compensation-Stock Compensation, as it relates to such awards. The guidance is effective for fiscal years beginning after December 15, 2015, and may be applied prospectively or retrospectively. Early adoption is permitted. We do not believe the adoption of this guidance will have a significant impact on the Company’s consolidated statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. We do not believe the adoption of this guidance will have a significant impact on the Company’s consolidated statements and related disclosures.
In January 2015, the FASB issued ASU 2015-01,Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), which eliminates the concept of extraordinary items from U.S. GAAP as part of its simplification initiative. The ASU does not affect disclosure guidance for events or transactions that are unusual in nature or infrequent in their occurrence. The ASU is effective for interim and annual periods in fiscal years beginning after December 15, 2015. The ASU allows prospective or retrospective application. Early adoption is permitted.We do not believe the adoption of this guidance will have a significant impact on the Company’s consolidated statements and related disclosures.
In April 2015, the FASB issued ASU 2015-03,Simplifying the Presentation of Debt Issuance Costs, which intends to simplify the presentation of debt issuance costs.The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. We do not believe the adoption of this guidance will have a significant impact on the Company’s consolidated statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11,Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value for entities that do not measure inventory using the last-in, first-out or retail inventory method. The ASU also eliminates the requirement for these entities to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. The ASU requires prospective adoption and permits early adoption. The Company is currently evaluating the impact the adoption of this ASU will have on the Company’s consolidated financial statements and related disclosures.
8
| 7 |
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
In February 2016, the FASB issued ASU 2016-02,Leases, which revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The provisions of ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this ASU will have on the Company’s consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.The ASU changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The ASU is effective for annual and interim reporting periods beginning after December 15, 2016 with early adoption permitted. The Company is currently evaluating the impact of adoption of this ASU will have on the Company’s consolidated financial statements and related disclosures.
NOTE 2. DISCONTINUED OPERATIONS
As discussed above during the year ended December 31, 2014,in Note 1, on October 7, 2015, the Company and Gregory, its then wholly-owned subsidiary, completed the GMP Sale pursuantsold POC to the terms of the GMP Purchase Agreement.Dainese. The Company received $84,135$63,639 in cash for the GMP SalePOC Disposition and paid $2,995$2,946 in transaction fees for net proceeds of $81,140.$60,693. $739 of cash was sold as part of the transaction. Also, as of December 31, 2015, there was an unsettled working capital adjustment of $921 owed to Dainese which has been paid during the three months ending March 31, 2016. The Company recognized a pre-tax gain on such sale of $39,491 and tax expense of $19,424.
Additionally, as discussed above, on October 7, 2015, the$8,436.The Company sold POCperformed certain transition services related to Dainese and the assets and liabilities of POC are classified as held for sale as of September 30, 2015 and December 31, 2014. As the POC Disposition and received $245, which was completed duringrecorded as a reduction ofselling, general and administrative expenses in our fourth fiscal quarter of 2015, we expect to recognize a gain on the POC Dispositioncondensed consolidated financial statements during the three months ending Decemberended March 31, 2015.2016.
The carrying amountsSummarized results of the assets and liabilities ofdiscontinued operations for POC were classified as held for sale in our condensed consolidated balance sheet. The asset and liability balances as of September 30, 2015 were classified as current as we anticipated the sale of these assets and liabilities within a one year period. The carrying amounts wereare as follows:
| September 30, 2015 | December 31, 2014 | |||||||
| Cash | $ | 255 | $ | 1,246 | ||||
| Accounts receivable | 8,899 | 10,980 | ||||||
| Inventories | 13,685 | 7,692 | ||||||
| Prepaid and other current assets | 1,070 | 837 | ||||||
| Income tax receivable | - | 10 | ||||||
| Deferred income taxes | 756 | 483 | ||||||
| Total current assets held for sale | 24,665 | 21,248 | ||||||
| Property and equipment, net | 1,525 | 1,525 | ||||||
| Other intangible assets, net | 10,599 | 12,354 | ||||||
| Indefinite lived intangible assets | 11,683 | 12,607 | ||||||
| Goodwill | 11,449 | 12,355 | ||||||
| Deferred income taxes | 127 | - | ||||||
| Other long-term assets | 57 | 89 | ||||||
| Total assets held for sale | $ | 60,105 | $ | 60,178 | ||||
| Accounts payable and accrued liabilities | $ | 5,679 | $ | 3,967 | ||||
| Income tax payable | 237 | - | ||||||
| Current portion of long-term debt | 5,841 | 3,875 | ||||||
| Total current liabilities held for sale | 11,757 | 7,842 | ||||||
| Long-term debt | - | 3 | ||||||
| Deferred income taxes | 4,977 | 5,103 | ||||||
| Total liabilities held for sale | $ | 16,734 | $ | 12,948 | ||||
| Three Months Ended | ||||||||
| March 31, 2016 | March 31, 2015 | |||||||
| Sales | $ | - | $ | 8,382 | ||||
| Cost of goods sold | - | (4,207 | ) | |||||
| Selling, general and administrative | - | (4,072 | ) | |||||
| Transaction costs | - | (135 | ) | |||||
| Interest expense, net | - | (16 | ) | |||||
| Other, net | - | 226 | ||||||
| Income from operations of discontinued operations | - | 178 | ||||||
| Gain on sale of discontinued operations | - | - | ||||||
| Income before taxes | - | 178 | ||||||
| Income tax expense | - | 108 | ||||||
| Income from discontinued operations, net of tax | $ | - | $ | 70 | ||||
9
| 8 |
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
Summarized results of discontinued operations for both GMP and POC are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2015 | September 30, 2014 | September 30, 2015 | September 30, 2014 | |||||||||||||
| Sales | $ | 10,826 | $ | 12,866 | $ | 24,234 | $ | 42,055 | ||||||||
| Cost of goods sold | (5,278 | ) | (6,567 | ) | (12,167 | ) | (22,853 | ) | ||||||||
| Selling, general and administrative | (3,547 | ) | (5,000 | ) | (11,606 | ) | (16,953 | ) | ||||||||
| Transaction costs | (847 | ) | (1,680 | ) | (1,428 | ) | (2,995 | ) | ||||||||
| Interest expense, net | (33 | ) | (89 | ) | (62 | ) | (781 | ) | ||||||||
| Other, net | 29 | 3,201 | 220 | 3,217 | ||||||||||||
| Income (loss) from operations of discontinued operations | 1,150 | 2,731 | (809 | ) | 1,690 | |||||||||||
| Gain on sale of discontinued operations | - | 39,491 | - | 39,491 | ||||||||||||
| Income (loss) before taxes | 1,150 | 42,222 | (809 | ) | 41,181 | |||||||||||
| Income tax expense (benefit) | 43 | 20,657 | (379 | ) | 20,589 | |||||||||||
| Income (loss) from discontinued operations, net of tax | $ | 1,107 | $ | 21,565 | $ | (430 | ) | $ | 20,592 | |||||||
In connection with the GMP Sale, all interest related to outstanding debt that was required to be repaid pursuant to the terms of the Company’s amended and restated loan agreement with Zions First National Bank (the “Lender”) is allocated to discontinued operations in our condensed consolidated financial statements.
Summarized condensed cash flow information for both GMP and POC discontinued operations are as follows:
| Nine Months Ended | ||||||||
| September 30, 2015 | September 30, 2014 | |||||||
| Depreciation of property and equipment | 414 | 440 | ||||||
| Amortization of intangible assets | 852 | 1,430 | ||||||
| Stock-based compensation | 201 | 349 | ||||||
| Purchase of property and equipment | (578 | ) | (682 | ) | ||||
| Three Months Ended | ||||||||
| March 31, 2016 | March 31, 2015 | |||||||
| Depreciation of property and equipment | - | 142 | ||||||
| Amortization of intangible assets | - | 324 | ||||||
| Stock-based compensation | - | 92 | ||||||
| Purchase of property and equipment | - | (217 | ) | |||||
NOTE 3. INVENTORIES
Inventories, as of September 30, 2015March 31, 2016 and December 31, 2014,2015, were as follows:
| September 30, 2015 | December 31, 2014 | |||||||
| Finished goods | $ | 44,272 | $ | 45,776 | ||||
| Work-in-process | 1,926 | 1,177 | ||||||
| Raw materials and supplies | 8,082 | 9,836 | ||||||
| $ | 54,280 | $ | 56,789 | |||||
10
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
| March 31, 2016 | December 31, 2015 | |||||||
| Finished goods | $ | 35,666 | $ | 43,117 | ||||
| Work-in-process | 2,032 | 1,730 | ||||||
| Raw materials and supplies | 8,488 | 6,649 | ||||||
| $ | 46,186 | $ | 51,496 | |||||
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment, net as of September 30, 2015March 31, 2016 and December 31, 2014,2015, were as follows:
| September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
| Land | $ | 2,850 | $ | 2,850 | $ | 2,850 | $ | 2,850 | ||||||||
| Building and improvements | 4,055 | 3,835 | 4,124 | 4,093 | ||||||||||||
| Furniture and fixtures | 3,458 | 3,598 | 3,301 | 3,320 | ||||||||||||
| Computer hardware and software | 4,976 | 4,907 | 4,758 | 4,729 | ||||||||||||
| Machinery and equipment | 9,927 | 9,265 | 10,093 | 9,790 | ||||||||||||
| Construction in progress | 571 | 533 | 785 | 477 | ||||||||||||
| 25,837 | 24,988 | 25,911 | 25,259 | |||||||||||||
| Less accumulated depreciation | (14,211 | ) | (12,753 | ) | (15,069 | ) | (14,469 | ) | ||||||||
| $ | 11,626 | $ | 12,235 | $ | 10,842 | $ | 10,790 | |||||||||
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
There was a decrease in goodwill during the nine months ended September 30, 2015, from $29,628 to $29,327, due to the impact of foreign currency exchange rates. In conjunction with the POC Disposition, there was a decrease in the Company’s market capitalization which was determined to be a triggering event for potential goodwill impairment. Accordingly, the Company performed a goodwill impairment analysis. The Company utilized the market capitalization, plus a reasonable control premium in the performance of its impairment test. The market capitalization was based upon the outstanding shares as of September 30, 2015 and the average market share price for three days including and following the announcement of the POC Disposition. It was determined that the fair value exceeded the carrying value. Based on the results of the Company’s impairment tests completed during the third quarter, the Company determined that goodwill was not impaired. If the market capitalization decreases in the future, a reasonable possibility exists that goodwill could be impaired and that such impairment may be material to the financial statements. The following table summarizes the changes in goodwill:
| Balance at December 31, 2014 | $ | 29,628 | ||
| Impact of foreign currency exchange rates | (301 | ) | ||
| Balance at September 30, 2015 | $ | 29,327 |
Indefinite Lived Intangible Assets
The Company owns certain tradenames and trademarks which provide Black Diamond Equipment, Ltd. (“Black Diamond Equipment” or “BDEL”) and PIEPS Holding GmbH and its subsidiaries (collectively, “PIEPS”) with the exclusive and perpetual rights to manufacture and sell their respective products. There was a decreasean increase in tradenames and trademarks during the ninethree months ended September 30, 2015,March 31, 2016, due to the impact of foreign currency exchange rates. The following table summarizes the changes in indefinite lived intangible assets:
| Balance at December 31, 2014 | $ | 22,993 | ||
| Impact of foreign currency exchange rates | (255 | ) | ||
| Balance at September 30, 2015 | $ | 22,738 |
11
| 9 |
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
| Balance at December 31, 2015 | $ | 22,644 | ||
| Impact of foreign currency exchange rates | 126 | |||
| Balance at March 31, 2016 | $ | 22,770 |
Other Intangible Assets, net
Intangible assets such as certain customer relationships, core technologies and product technologies are amortizable over their estimated useful lives. There was a decreasean increase in gross other intangible assets subject to amortization during the ninethree months ended September 30, 2015March 31, 2016 due to the impact of foreign currency exchange rates. The following table summarizes the changes in gross other intangible assets:
| Gross balance at December 31, 2014 | $ | 17,633 | ||
| Impact of foreign currency exchange rates | (367 | ) | ||
| Gross balance at September 30, 2015 | $ | 17,266 |
| Gross balance at December 31, 2015 | $ | 17,130 | ||
| Impact of foreign currency exchange rates | 181 | |||
| Gross balance at March 31, 2016 | $ | 17,311 |
Other intangible assets, net of amortization as of September 30, 2015March 31, 2016 and December 31, 2014,2015, were as follows:
| September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
| Customer lists and relationships | $ | 14,101 | $ | 14,306 | $ | 14,126 | $ | 14,026 | ||||||||
| Product technologies | 2,218 | 2,380 | 2,238 | 2,157 | ||||||||||||
| Core technologies | 947 | 947 | 947 | 947 | ||||||||||||
| 17,266 | 17,633 | 17,311 | 17,130 | |||||||||||||
| Less accumulated amortization | (5,970 | ) | (5,075 | ) | (6,525 | ) | (6,196 | ) | ||||||||
| $ | 11,296 | $ | 12,558 | $ | 10,786 | $ | 10,934 | |||||||||
NOTE 6. LONG-TERM DEBT
Long-term debt, net as of September 30, 2015March 31, 2016 and December 31, 2014,2015, was as follows:
| September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
| Revolving credit facilities (a) | $ | - | $ | - | $ | - | $ | - | ||||||||
| Foreign credit facilities (b) | - | - | ||||||||||||||
| 5% Senior Subordinated Notes due 2017 (refer to Note 16) | 19,624 | 18,491 | 22,610 | 22,610 | ||||||||||||
| Term notes (c) | 107 | 68 | ||||||||||||||
| Term note (b) | 110 | 105 | ||||||||||||||
| Unamortized discount | (2,163 | ) | (2,582 | ) | ||||||||||||
| 19,731 | 18,559 | 20,557 | 20,133 | |||||||||||||
| Less current portion | - | - | (110 | ) | - | |||||||||||
| $ | 19,731 | $ | 18,559 | $ | 20,447 | $ | 20,133 | |||||||||
| (a) | As of |
| (b) | The |
12
| 10 |
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
NOTE 7. OTHER LONG-TERM LIABILITIES
Other long-term liabilities were $2,412$2,069 and $2,142$2,042 as of September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively, with $2,169$1,741 and $2,131$1,689 of the balance as of September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively, relating to a pension liability with respect to the benefit plan maintained for the benefit of the Company’s employees in Switzerland that, under U.S. GAAP, is considered to be a defined benefit plan.Switzerland. The Company also has an insurance policy whereby any underfunded amounts related to the pension liability are expected to be recoverable. The Company has recorded a receivable of $2,169$1,741 and $2,131$1,689 as other long-term assets for the underfunded amount as of September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively. The significant assumptions used in accounting for the defined benefit pension plan were as follows:
| March 31, 2016 | December 31, 2015 | |||||||
| Discount rate | 1.0 | % | 1.0 | % | ||||
| Expected long-term return on plan assets | 2.2 | % | 2.2 | % | ||||
| Rate of compensation increase | 2.0 | % | 2.0 | % | ||||
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 foreign currency 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 September 30, 2015,March 31, 2016, the Company’s derivative contracts had a remaining maturity of less than one year. The counterparty to these transactions had both long-term and short-term investment grade credit ratings. The maximum net exposure of the Company’s credit risk to the counterparty is generally limited to the aggregate unrealized loss of all contracts with that counterparty. At September 30, 2015 there was no such exposure to the counterparty. The Company’s exposure of counterparty credit risk is limited to the aggregate unrealized gainloss of $3,150$1,075 on all contracts at September 30, 2015.March 31, 2016. 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, 2015March 31, 2016 and December 31, 2014:2015:
| Notional | Latest | |||||
| Amount | Maturity | |||||
| Foreign exchange contracts - Canadian Dollars | 8,129 | February 2017 | ||||
| Foreign exchange contracts - British Pounds | 1,600 | February 2017 | ||||
| Foreign exchange contracts - Euros | 13,727 | February 2017 | ||||
| Foreign exchange contracts - Swiss Francs | 17,200 | February 2017 | ||||
| December 31, 2015 | ||||||
| Notional | Latest | |||||
| Amount | Maturity | |||||
| Foreign exchange contracts - Canadian Dollars | February 2016 | |||||
| Foreign exchange contracts - British Pounds | February | |||||
| Foreign exchange contracts - Euros | February | |||||
| Foreign exchange contracts - Swiss Francs | February | |||||
| 11 | ||||||
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
The Company accounts for these contracts as cash flow hedges and tests effectiveness by determining whether changes in the expected cash flow of the derivative offset, within a range, changes in the expected 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 loss and reclassified to sales in the period the underlying hedged item is recognized in earnings. Gains (losses) of $1,530$(141) and $332$1,599 were reclassified to sales during the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively, and $4,126 and $(218) were reclassified to sales during the nine months ended September 30, 2015 and 2014, respectively. Gains (losses) of $76$0 and $(31)$107 were reclassified to discontinued operations, net of tax, during the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively, and $183 and $(76) were reclassified to discontinued operations, net of tax, during the nine months ended September 30, 2015 and 2014, respectively.
13
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
As of December 31, 2014,2015, the Company reported an accumulated derivative instrument gainloss of $1,891.$68. During the ninethree months ended September 30, 2015,March 31, 2016, the Company reported accumulated other comprehensive loss of $821,$712, as a result of the change in fair value of these contracts and reclassifications to sales and discontinued operations as discussed above, resulting in an accumulated derivative instrument gainloss of $1,070$780 reported as of September 30, 2015.March 31, 2016.
The following table presents the balance sheet classification and fair value of derivative instruments as of September 30, 2015March 31, 2016 and December 31, 2014:2015:
| Classification | September 30, 2015 | December 31, 2014 | Classification | March 31, 2016 | December 31, 2015 | |||||||||||||||
| Derivative instruments in asset positions: | ||||||||||||||||||||
| Forward exchange contracts | Prepaid and other current assets | $ | 2,821 | $ | 2,908 | |||||||||||||||
| Forward exchange contracts | Assets held for sale | $ | 329 | $ | 158 | Prepaid and other current assets | $ | 222 | $ | 893 | ||||||||||
| Forward exchange contracts | Other long-term assets | $ | - | $ | 446 | Other long-term assets | $ | - | $ | 12 | ||||||||||
| Derivative instruments in liability positions: | ||||||||||||||||||||
| Forward exchange contracts | Accounts payable and accrued liabilities | $ | - | $ | 79 | Accounts payable and accrued liabilities | $ | 1,297 | $ | - | ||||||||||
| Forward exchange contracts | Other long-term liabilities | $ | - | $ | 11 | Other long-term liabilities | $ | - | $ | 25 | ||||||||||
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income (“AOCI”) primarily consists of unrealized losses in our marketable securities, foreign currency translation adjustments and changes in our forward foreign exchange contracts. The components of AOCI, net of tax, were as follows:
| Unrealized Losses on Marketable Securities | Foreign Currency Translation Adjustments | Unrealized Gains (Losses) on Cash Flow Hedges | Total | |||||||||||||
| Balance as of December 31, 2014 | $ | (59 | ) | $ | (4,244 | ) | $ | 1,891 | $ | (2,412 | ) | |||||
| Other comprehensive (loss) income before reclassifications | (424 | ) | (4,041 | ) | 1,986 | (2,479 | ) | |||||||||
| Amounts reclassified from other comprehensive income (loss) | - | (606 | ) | (2,807 | ) | (3,413 | ) | |||||||||
| Net current period other comprehensive loss | (424 | ) | (4,647 | ) | (821 | ) | (5,892 | ) | ||||||||
| Balance as of September 30, 2015 | $ | (483 | ) | $ | (8,891 | ) | $ | 1,070 | $ | (8,304 | ) | |||||
14
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
| Unrealized Losses on Marketable Securities | Foreign Currency Translation Adjustments | Unrealized Gains (Losses) on Cash Flow Hedges | Total | |||||||||||||
| Balance as of December 31, 2015 | $ | (107 | ) | $ | (1,035 | ) | $ | (68 | ) | $ | (1,210 | ) | ||||
| Other comprehensive (loss) income before reclassifications | 86 | 708 | (853 | ) | (59 | ) | ||||||||||
| Amounts reclassified from other comprehensive loss | - | (22 | ) | 141 | 119 | |||||||||||
| Net current period other comprehensive (loss) income | 86 | 686 | (712 | ) | 60 | |||||||||||
| Balance as of March 31, 2016 | $ | (21 | ) | $ | (349 | ) | $ | (780 | ) | $ | (1,150 | ) | ||||
The effects on net loss of amounts reclassified from unrealized gains on cash flow hedges for foreign exchange contracts and foreign currency translation adjustments for the three and nine months ended September 30, 2015,March 31, 2016, were as follows:
| Gains reclassified from AOCI to the Consolidated Statement of Comprehensive Loss | ||||||||
| Affected line item in the Condensed Consolidated Statement of Comprehensive Loss | For the Three Months Ended September 30, 2015 | For the Nine Months Ended September 30, 2015 | ||||||
| Foreign exchange contracts: | ||||||||
| Sales | $ | 1,530 | $ | 4,126 | ||||
| Less: Income tax expense | 557 | 1,502 | ||||||
| Discontinued operations, net of tax | 76 | 183 | ||||||
| Amount reclassified, net of tax | $ | 1,049 | $ | 2,807 | ||||
| Foreign currency translation adjustments: | ||||||||
| Other, net | $ | 606 | $ | 606 | ||||
| Total reclassificaitons from AOCI | $ | 1,655 | $ | 3,413 | ||||
| 12 |
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
| Affected line item in the Condensed Consolidated Statement of Comprehensive Loss | Gains (losses) reclassified from AOCI to the Condensed Consolidated Statement of Comprehensive Loss | |||
| Foreign exchange contracts: | ||||
| Sales | $ | (141 | ) | |
| Less: Income tax expense | - | |||
| Amount reclassified, net of tax | $ | (141 | ) | |
| Foreign currency translation adjustments: | ||||
| Other, net | $ | 22 | ||
| Total reclassificaitons from AOCI | $ | (119 | ) | |
The Company’s policy is to classify reclassifications of cumulative foreign currency translation from AOCI to Other, net.
NOTE 10. FAIR VALUE 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. |
15 Assets and liabilities measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015 were as follows:
| March 31, 2016 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Marketable securities | $ | 9,910 | $ | - | $ | - | $ | 9,910 | ||||||||
| Forward exchange contracts | - | 222 | - | 222 | ||||||||||||
| $ | 9,910 | $ | 222 | $ | - | $ | 10,132 | |||||||||
| Liabilities | ||||||||||||||||
| Forward exchange contracts | $ | - | $ | 1,297 | $ | - | $ | 1,297 | ||||||||
| $ | - | $ | 1,297 | $ | - | $ | 1,297 | |||||||||
| December 31, 2015 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Marketable securities | $ | 9,824 | $ | - | $ | - | $ | 9,824 | ||||||||
| Forward exchange contracts | - | 905 | - | 905 | ||||||||||||
| $ | 9,824 | $ | 905 | $ | - | $ | 10,729 | |||||||||
| Liabilities | ||||||||||||||||
| Forward exchange contracts | $ | - | $ | 25 | $ | - | $ | 25 | ||||||||
| $ | - | $ | 25 | $ | - | $ | 25 | |||||||||
| 13 |
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
Assets and liabilities measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014 were as follows:
| September 30, 2015 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Marketable securities | $ | 9,235 | $ | - | $ | - | $ | 9,235 | ||||||||
| Forward exchange contracts | - | 3,150 | - | 3,150 | ||||||||||||
| $ | 9,235 | $ | 3,150 | $ | - | $ | 12,385 | |||||||||
| Liabilities | ||||||||||||||||
| Forward exchange contracts | $ | - | $ | - | $ | - | $ | - | ||||||||
| $ | - | $ | - | $ | - | $ | - | |||||||||
| December 31, 2014 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Marketable securities | $ | 9,902 | $ | - | $ | - | $ | 9,902 | ||||||||
| Forward exchange contracts | - | 3,512 | - | 3,512 | ||||||||||||
| $ | 9,902 | $ | 3,512 | $ | - | $ | 13,414 | |||||||||
| Liabilities | ||||||||||||||||
| Forward exchange contracts | $ | - | $ | 90 | $ | - | $ | 90 | ||||||||
| $ | - | $ | 90 | $ | - | $ | 90 | |||||||||
The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values due to the short-term nature and liquidity of these financial instruments. Marketable securities are recorded at fair value based on quoted market prices. Derivative financial instruments are recorded at fair value based on current market pricing models. The Company estimates that, based on current market conditions, the fair value of its long-term debt obligations under its revolving credit facility and senior subordinated notes payable approximate the carrying values at September 30, 2015March 31, 2016 and December 31, 2014.2015.
Nonrecurring Fair Value Measurements
There were no assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2016. Assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2015 were as follows:
| December 31, 2015 | ||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Total Losses | ||||||||||||||||
| Goodwill | $ | - | $ | - | $ | - | $ | - | $ | 29,507 | ||||||||||
The Company has certain assets that are measured at fair value on a nonrecurring basis when impairment indicators are present. The categorization of the framework used to estimate the fair value of the assets is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. The assets are adjusted to fair value only when the carrying values exceed the fair values. Based on the results of the Company’s annual impairment tests completed during the year ended December 31, 2015, the Company determined that goodwill was impaired. As a result, we recognized impairment charges during the year ended December 31, 2015.
NOTE 11. 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 dilutive outstanding stock options and unvested restricted stock grants. Potentially dilutive securities are excluded from the computation of diluted earnings per share if their effect is anti-dilutive to loss from continuing operations.
16
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
The following table is a reconciliation of basic and diluted shares of common stock outstanding used in the calculation of earnings per share:
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| September 30, 2015 | September 30, 2014 | September 30, 2015 | September 30, 2014 | March 31, 2016 | March 31, 2015 | |||||||||||||||||||
| Weighted average shares outstanding - basic | 32,776 | 32,585 | 32,735 | 32,525 | 30,899 | 32,704 | ||||||||||||||||||
| Effect of dilutive stock awards | - | - | - | - | - | - | ||||||||||||||||||
| Weighted average shares outstanding - diluted | 32,776 | 32,585 | 32,735 | 32,525 | 30,899 | 32,704 | ||||||||||||||||||
| Loss from continuing operations per share: | ||||||||||||||||||||||||
| Basic | $ | (1.50 | ) | $ | (0.04 | ) | $ | (1.67 | ) | $ | (0.20 | ) | $ | (0.13 | ) | $ | (0.05 | ) | ||||||
| Diluted | (1.50 | ) | (0.04 | ) | (1.67 | ) | (0.20 | ) | (0.13 | ) | (0.05 | ) | ||||||||||||
| Income (loss) from discontinued operations per share: | ||||||||||||||||||||||||
| Income from discontinued operations per share: | ||||||||||||||||||||||||
| Basic | $ | 0.03 | $ | 0.67 | $ | (0.02 | ) | $ | 0.63 | $ | - | $ | - | |||||||||||
| Diluted | 0.03 | 0.67 | (0.02 | ) | 0.63 | - | - | |||||||||||||||||
| Net (loss) income per share: | ||||||||||||||||||||||||
| Net loss per share: | ||||||||||||||||||||||||
| Basic | $ | (1.47 | ) | $ | 0.63 | $ | (1.69 | ) | $ | 0.43 | $ | (0.13 | ) | $ | (0.05 | ) | ||||||||
| Diluted | (1.47 | ) | 0.63 | (1.69 | ) | 0.43 | (0.13 | ) | (0.05 | ) | ||||||||||||||
| 14 |
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
For the three months ended September 30,March 31, 2016 and 2015, and 2014, equity awards of 2,9952,379 and 3,705, respectively, and for the nine months ended September 30, 2015 and 2014, equity awards of 3,241 and 3,567,3,611, respectively, were outstanding and anti-dilutive and therefore not included in the calculation of loss per share for these periods.
NOTE 12. STOCK-BASED COMPENSATION PLAN
Under the Company’s current 2015 Stock Incentive Plan (the “2015 Plan”) and the previous 2005 Stock Incentive Plan (the “2005 Plan”), the Company’s Board of Directors (the “Board of Directors”) had 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 20052015 Plan allowedallows 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 couldmay be granted through awards under the 20052015 Plan to any employee in any calendar year could not exceed 500 shares. The 2005 Plan continued in effect until June 2015 when it expired in accordance with its terms. The 2015 Plan will continue in effect until December 2025 unless terminated sooner.
During the ninethree months ended September 30, 2015,March 31, 2016, the Company issued 10did not issue any stock options under the 20052015 Plan to employees of the Company, which options granted will vest in three installments as follows: 4 shall vest on December 31, 2016, and the remaining shares shall vest equally on December 31, 2017 and December 31, 2018.
17
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
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:
Options Granted During the Nine Months Ended September 30, 2015
| Number of options | 10 | |||
| Option vesting period | 4 Years | |||
| Grant price | $ | 6.67 | ||
| Dividend yield | 0.00 | % | ||
| Expected volatility (a) | 53.00 | % | ||
| Risk-free interest rate | 1.86 | % | ||
| Expected life (years) (b) | 6.45 | |||
| Weighted average fair value | $ | 3.53 |
Using these assumptions, the fair value of all stock options granted during the nine months ended September 30, 2015 was $35, which is being recognized over the vesting period of the options.
The total non-cash stock compensation expense for continuing operations related to restricted stock, stock options and stock awards recorded by the Company for the three months ended September 30,March 31, 2016 and 2015 was $36 and 2014 was $126 and $715, respectively, and for$371, respectively. For the ninethree months ended September 30,March 31, 2016 and 2015, the majority of stock-based compensation costs were classified as selling, general and 2014 was $1,028 and $1,038, respectively.administrative expense. 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 or using the Monte-Carlo pricing model. As of September 30, 2015,March 31, 2016, there were 638256 unvested stock options and unrecognized compensation cost of $1,412$767 related to unvested stock options, as well as 310290 unvested restricted stock awards and unrecognized compensation cost of $57$41 related to unvested restricted stock awards. As of September 30, 2015,March 31, 2016, the Company has unvested restricted stock awards which vest based upon satisfaction of a performance condition. Achievement of the performance condition is currently not considered probable. Consequently, the Company has not recorded compensation costs associated with the performance condition awards.
NOTE 13. RESTRUCTURING
The Company initiated a restructuring plan in 2014 (“2014 Restructuring Plan”) to realign resources within the organization and anticipates completing the plan in 2015.2016. During the three and nine months ended September 30,March 31, 2016 and 2015, we incurred restructuring charges of $427$0 and $2,303,$468, respectively, related to the 2014 Plan. During the three and nine months ended September 30, 2014, we incurred restructuring charges of $2,180 and $2,590. Restructuring charges of $700 were incurred during the nine months ended September 30, 2015, which related to the write-off of inventory that was distinguishable and directly attributable to the Company’s 2014 Plan and not as a result of external market factors associated with the ongoing business.Plan. We have incurred $5,886$5,939 of cumulative restructuring charges since the commencement of the 2014 Restructuring Plan. We estimate that we will incur restructuring costs related to employee-related costs and facilityother exit costs during the remainder of 2015.2016.
As part of the conclusion of the Company’s review of strategic alternatives, the Company initiated restructuring activities in efforts to further realign resources within the organization (“2015 Restructuring Plan”) and anticipates completing the plan in 2016. During the three and nine months ended September 30, 2015,March 31, 2016, we incurred restructuring charges of $269$462 related to the 2015 Restructuring Plan. There were no costs incurred related to the 2015 Restructuring Plan during 2014.the three months ended March 31, 2015. We have incurred $269$1,481 of cumulative restructuring charges since the commencement of the 2015 Restructuring Plan.
18
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
The following table summarizes the restructuring charges, payments and the remaining accrual related to employee termination costs and facility exit costs.
| 2014 Plan | 2015 Plan | 2014 Restructuring Plan | 2015 Restructuring Plan | Total Restructuring | ||||||||||||||||
| Balance at December 31, 2014 | $ | 199 | $ | - | ||||||||||||||||
| Balance at December 31, 2015 | $ | 162 | $ | 460 | $ | 622 | ||||||||||||||
| Charges to expense: | ||||||||||||||||||||
| Employee termination benefits | 1,252 | 269 | - | 373 | 373 | |||||||||||||||
| Inventory write-off | 700 | - | ||||||||||||||||||
| Other costs | 351 | - | - | 89 | 89 | |||||||||||||||
| Total restructuring charges | 2,303 | 269 | - | 462 | 462 | |||||||||||||||
| Cash payments and non-cash charges: | ||||||||||||||||||||
| Cash payments | (1,543 | ) | - | (77 | ) | (499 | ) | (576 | ) | |||||||||||
| Inventory write-off | (700 | ) | - | |||||||||||||||||
| Balance at September 30, 2015 | $ | 259 | $ | 269 | ||||||||||||||||
| Balance at March 31, 2016 | $ | 85 | $ | 423 | $ | 508 | ||||||||||||||
| 15 |
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
As of September 30, 2015,March 31, 2016, termination costs and restructuring costs remained in accrued liabilities and are expected to be paid during the remainder of 2015.2016.
NOTE 14. 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.There is a reasonable possibility of loss from contingencies in excess of the amounts accrued by the Company in the accompanying condensed consolidated balance sheets; however, the actual amounts of such possible losses cannot currently be reasonably estimated by the Company at this time. It is possible that, as additional information becomes available, the impact on the Company 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 condensed consolidated balance sheets.
Total rent expense for continuing operations of the Company for the three months ended September 30,March 31, 2016 and 2015 was $365 and 2014 was $352 and $483, respectively, and for the nine months ended September 30, 2015 and 2014 was $1,195 and $1,469,$439, respectively.
NOTE 15. INCOME TAXES
The Company’s foreign operations that are considered to be permanently reinvested have statutory tax rates of 25%.
As of December 31, 2014,2015, the Company’s gross deferred tax asset was $73,465.$71,288. The Company had recorded a valuation allowance of $16,081,$62,915, resulting in a net deferred tax asset of $57,384,$8,373, before deferred tax liabilities of $21,644.$17,342. The Company has provided a valuation allowance against a portion of the net deferred tax assets as of December 31, 2014,2015, because the ultimate realization of those assets did not meet the more likely than not criteria.
19
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
( The majority of the Company’s deferred tax assets consist of net operating loss carryforwards for federal tax purposes. If a change in thousands, except per share amounts)control were to occur, these could be limited under Section 382 of the Internal Revenue Code of 1986 (“Code”), as amended.
In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and net operating loss and credit carryforwards expire. The estimates and judgments associated with the Company’s valuation allowance on deferred tax assets are considered critical due to the amount of deferred tax assets recorded by the Company on its consolidated balance sheet and the judgment required in determining the Company’s future taxable income. The need for a valuation allowance is reassessed at each interim reporting period. During the three monthsyear ended September 30,December 31, 2015, the Company recorded an increase to its valuation allowance of $49,194. The change in valuation allowance resulted in a discrete charge to income tax expense of $48,335 for the three and nine months ended September 30, 2015. Certain events and circumstances transpired during the three months ended September 30, 2015, which caused the Company to conclude that the realization of some portion of its deferred tax assets does not satisfy the more-likely-than-not threshold. As a result of the POC Disposition that occurred on October 7, 2015, the assets and liabilities of POC have been segregated and reported as held for sale as of September 30, 2015 and December 31, 2014. The POC Disposition removed a substantial portion of the Company’s projected future taxable income. Additionally, during the three months ended September 30, 2015, the Company made the decision to scale back its apparel initiative and announced a realignment of resources. The totality of these events and circumstances impedes management’s ability to forecast future long-term taxable income to the extent that it does not meet the more likely than not threshold.$47,287.
As of December 31, 2014,2015, the Company had net operating loss, research and experimentation credit and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $167,303$166,206 ($294 relates to excess tax benefits related to share based payment compensation, which will not be recorded until an income tax payable exists), $1,337$1,408 and $56, respectively. To the extent the Company has future taxable income, theThe Company believes its U.S. Federal net operating loss (“NOL”) will substantially offset its future U.S. Federal income taxes, excluding the amount subject to U.S. Federal Alternative Minimum Tax (“AMT”). AMT is calculated as 20% of AMT income. For purposes of AMT, a maximum of 90% of income is offset by available NOLs. The majority of the Company’s pre-tax income is currently earned and expected to be earned in the U.S., or taxed in the U.S. as Subpart F. income and will be offset with the NOL.
NOLs available to offset taxable income, subject to compliance with Section 382 of the Internal Revenue Code, as amended (the “Code”) begin to expire based upon the following schedule:
| 16 |
Net Operating Loss Carryforward Expiration Dates
December 31, 2014BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
| Expiration Dates December 31, | Net Operating Loss Amount | |||
| 2021 | $ | 32,428 | ||
| 2022 | 115,000 | |||
| 2023 | 5,712 | |||
| 2024 | 3,566 | |||
| 2025 and beyond | 10,597 | |||
| Total | 167,303 | |||
| Excess stock based payment tax deductions | (294 | ) | ||
| After limitations | $ | 167,009 | ||
| Net Operating Loss Carryforward Expiration Dates |
| December 31, 2015 |
| Expiration Dates December 31, | Net Operating Loss Amount | |||
| 2021 | $ | 32,408 | ||
| 2022 | 115,000 | |||
| 2023 | 5,712 | |||
| 2024 | 3,566 | |||
| 2025 and beyond | 9,520 | |||
| Total | 166,206 | |||
| Excess stock based payment tax deductions | (294 | ) | ||
| After limitations | $ | 165,912 | ||
NOTE 16. RELATED PARTY TRANSACTIONS
5% Unsecured Subordinated Notes due May 28, 2017
As part of the consideration payable to the stockholders of Gregory when the Company acquired Gregory, the Company issued $14,517, $7,539, and $554 in 5% Unsecured Subordinated Notes due May 28, 2017 (the “Merger Consideration Subordinated Notes”) to Kanders GMP Holdings, LLC, Schiller Gregory Investment Company, LLC, and five former employees of Gregory, respectively. Mr. Warren B. Kanders, the Company’s Executive Chairman and a member of its Board of Directors, is a majority member and a trustee of the manager of Kanders GMP Holdings, LLC. The sole manager of Schiller Gregory Investment Company, LLC is Mr. Robert R. Schiller, the Company’s Executive Vice Chairman and a member of its Board of Directors. The principal terms of the Merger Consideration Subordinated Notes are as follows: (i) the principal amount is due and payable on May 28, 2017 and is prepayable by the Company at any time; (ii) interest will accrue on the principal amount at the rate of 5% per annum and shall be payable quarterly in cash; (iii) the default interest rate shall accrue at the rate of 10% per annum during the occurrence of an event of default; and (iv) events of default, which can only be triggered with the consent of Kanders GMP Holdings, LLC, are: (a) the default by the Company on any payment due under a Merger Consideration Subordinated Note; (b) the Company’s failure to perform or observe any other material covenant or agreement contained in the Merger Consideration Subordinated Notes; or (c) the Company’s instituting or becoming subject to a proceeding under the Bankruptcy Code (as defined in the Merger Consideration Subordinated Notes). The Merger Consideration Subordinated Notes are junior to all senior indebtedness of the Company, except that payments of interest continue to be made under the Merger Consideration Subordinated Notes as long as no event of default exists under any senior indebtedness.
20
BLACK DIAMOND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands, except per share amounts)
Given the below market interest rate for comparably secured notes and the relative illiquidity of the Merger Consideration Subordinated Notes, we have discounted the notes to $8,640, $4,487 and $316, respectively, at the date of acquisition. We are accreting the discount on the Merger Consideration Subordinated Notes to interest expense using the effective interest method over the term of the Merger Consideration Subordinated Notes. The effective interest rate is approximately 14%.
On April 7, 2011, Schiller Gregory Investment Company, LLC transferred its Merger Consideration Subordinated Note in equal amounts to the Robert R. Schiller Cornerstone Trust and the Deborah Schiller 2005 Revocable Trust. On June 24, 2013, the Robert R. Schiller Cornerstone Trust dated September 9, 2010 transferred its Merger Consideration Subordinated Note in the amount of $3,769 to the Robert R. Schiller 2013 Cornerstone Trust dated June 24, 2013. During the three and nine months ended September 30, 2015,March 31, 2016, $181 and $544 in interest was paid to Kanders GMP Holdings, LLC, respectively, and $95 and $283$94 in interest respectively, was paid to the Robert R. Schiller 2013 Cornerstone Trust and the Deborah Schiller 2005 Revocable Trust pursuant to the outstanding Merger Consideration Subordinated Notes.
On May 29, 2012 and August 13, 2012, five former employees of Gregory exercised certain sales rights and sold Merger Consideration Subordinated Notes in the aggregate principal amount of approximately $365 to Kanders GMP Holdings, LLC and in the aggregate principal amount of approximately $189 to Schiller Gregory Investment Company, LLC. During the three and nine months ended September 30, 2015,March 31, 2016, $5 and $14 in interest was paid to Kanders GMP Holdings, LLC, respectively, and $2 and $7 in interest respectively, was paid to Schiller Gregory Investment Company, LLC, pursuant to these outstanding Merger Consideration Subordinated Notes.
NOTE 17. SUBSEQUENT EVENT
Peter Metcalf
Mr. Peter Metcalf provided the Company with notice, which became effective on November 5, 2015, that he will voluntarily terminate his Employment Agreement, dated as of June 5, 2013, with the Company and will retire as the Company’s Chief Executive Officer effective as of December 31, 2015. In connection therewith, Mr. Metcalf has provided a general release of the Company, and will not compete with the Company for a period of five years after the effective date of his retirement as the Company’s Chief Executive Officer.
Amendment No. 1 to Second Amended and Restated Loan Agreement
On November 9, 2015, the Company together with its direct and indirect domestic subsidiaries entered into a first amendment (the “Amendment”) to the second amended and restated loan agreement dated as of October 31, 2014 (the “Loan Agreement”) with the Lender. Pursuant to the Amendment the minimum net worth financial covenant required to be maintained by the Company and each of its domestic wholly-owned subsidiaries for the year ending December 31, 2015 was reduced from $240,000 to $170,000 with an annual increase of $2,000 for each fiscal year thereafter, and certain additional changes were also made to the Loan Agreement.
21
| 17 |
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
Please note that in this Quarterly Report on Form 10-Q we may use words such as “appears,” “anticipates,” “believes,” “plans,” “expects,” “intends,” “future” and similar expressions which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting the Company and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
Potential risks and uncertainties that could cause the actual results of operations or financial condition of the Company to differ materially from those expressed or implied by forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, the overall level of consumer spending on our products; general economic conditions and other factors affecting consumer confidence; disruption and volatility in the global capital and credit markets; the financial strength of the Company's customers; the Company's ability to implement its reformation and growth strategy, including its ability to organically grow each of its historical product lines; the ability of the Company to identify potential acquisition or investment opportunities as part of its redeployment and diversification strategy; the Company’s ability to successfully redeploy its capital into diversifying assets or that any such redeployment will result in the Company’s future profitability; 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, patents and other intellectual property rights; fluctuations in the price, availability and quality of raw materials and contracted products as well as 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 of the date hereof. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
Overview
Black Diamond, Inc. (which may be referred to as “Black Diamond,”the “Company,” “we,” “our” or “us”), through its ownership of Black Diamond Equipment, Ltd., is a global leader in designing, manufacturing, and marketing innovative active outdoor performance equipment and apparel for climbing, mountaineering, backpacking, skiing, and a wide range of other year-round outdoor recreation activities. Our principal brands include Black Diamond® and PIEPS™ and are targeted not only to the demanding requirements of core climbers, skiers, and skiers,alpinists, 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® and PIEPS™ brands are iconic in the active outdoor industryand ski industries, and linked intrinsically with the modern history of these sports. 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: high performance apparel (such as jackets, shells, pants and bibs); rock-climbing equipment (such as carabiners, protection devices, harnesses, belay devices, helmets, and ice-climbing gear); technical backpacks and high-end day packs; tents; trekking poles; headlamps and lanterns; and gloves and mittens. We also offer advanced design skis, ski poles, ski bindings, ski boots, ski skins, and ski safety products, including avalanche airbag systems, 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, LLC (which may be referred to as “Gregory Mountain Products”, “Gregory” or “GMP”). 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”).
On July 23, 2014, the Company and Gregory Mountain Products, LLC (“Gregory” or “GMP”), its then wholly-owned subsidiary, completed the sale of certain assets to Samsonite LLC (“Samsonite”) comprising Gregory’s business of designing, manufacturing, marketing, distributing and selling technical, alpine, backpacking, hiking, mountaineering and active trail products and accessories as well as outdoor-inspired lifestyle bags (the “Business”“Gregory Business”) pursuant to the terms of that certain Asset Purchase Agreement (the “GMP Purchase Agreement”), dated as of June 18, 2014, by and among the Company, Gregory and Samsonite. Under the terms of the GMP Purchase Agreement, Samsonite paid $84,135 in cash for Gregory’s assets comprising the Gregory Business and assumed certain specified liabilities (the “GMP Sale”). The activities of Gregory have been segregated and reported as discontinued operations for all periods presented. See Note 2. Discontinued Operations to the notes to the unaudited condensed consolidated financial statements.
On October 7, 2015, the Company and the Company’s wholly owned subsidiary, Ember Scandinavia AB (“Ember”), sold (“POC Disposition”) their respective equity interests in POC USA, LLC and POC Sweden AB (collectively, “POC”) comprising POC’s business of designing, manufacturing, marketing, distributing and selling advanced-design helmets, body armor, goggles, eyewear, gloves, and apparel for action or “gravity sports,” such as skiing, snowboarding, and cycling pursuant to a Purchase Agreement (the “POC Purchase Agreement”) dated as of October 7, 2015, by and among the Company and Ember, as sellers, and Dainese S.p.A. and Dainese U.S.A., Inc. (collectively “Dainese”), as purchasers. Under the terms of the POC Purchase Agreement, Dainese paid $65,000 in cash (before purchase price adjustments of $(440) relating to net working capital and net debt) for the POC Disposition. The assets and liabilities of POC have been segregated and reported as held for sale as of September 30, 2015 and December 31, 2014. Furthermore, the activities of POC have been segregated and reported as discontinued operations for all periods presented. See Note 2. Discontinued Operations to the notes to the unaudited condensed consolidated financial statements.
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BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
On March 16, 2015, the Company announced that it engaged Rothschild Inc. and Robert W. Baird & Co., Incorporated as financial advisors to lead an exploration of a full range of strategic alternatives, including a sale of the entire Company and the potential sales of the Company’s Black Diamond Equipment (including PIEPS) and POC brands in two separate transactions.
On October 7, 2015, the Company and the Company’s wholly owned subsidiary, Ember Scandinavia AB (“Ember”), sold their respective equity interests in POC comprising POC’s business of designing, manufacturing, marketing, distributing and selling advanced-design helmets, body armor, goggles, eyewear, gloves, and apparel for action or “gravity sports,” such as skiing, snowboarding, and cycling pursuant to a Purchase Agreement (the “POC Purchase Agreement”), dated as of October 7, 2015, by and among the Company and Ember, as sellers, and Dainese S.p.A. and Dainese U.S.A., Inc. (collectively “Dainese”), as purchasers. Under the terms of the POC Purchase Agreement, Dainese paid $63,639 in cash for POC (the “POC Disposition”). Furthermore, the activities of POC have been segregated and reported as discontinued operations for all periods presented. See Note 2. Discontinued Operations to the notes to the condensed consolidated financial statements.
On October 8, 2015, the Company announced the completion of the POC Disposition resulting in the conclusion of the Company’s review of strategic alternatives.
On November 9, 2015, the Company announced that it has engaged Rothschild Inc. as a financial advisor to assist the Company to seek to redeploy our significant cash balances to invest in high-quality, durable, cash flow-producing assets potentially unrelated to the outdoor industry in order to diversify our business and potentially monetize our substantial net operating losses as part of our asset redeployment and diversification strategy. We intend to focus our search primarily in the United States, although we will also evaluate international investment opportunities should we find such opportunities attractive.
Critical Accounting Policies and Use of Estimates
Management’s discussion of our financial condition and results of operations is based on the condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the condensed 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 condensed 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.
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, 2014.2015, except elimination of the policy associated with the evaluation of the valuation of goodwill, as goodwill was fully impaired during the year ended December 31, 2015.
Accounting Pronouncements Issued Not Yet Adopted
See “Recent Accounting Pronouncements” in Note 1 to the notes to the unaudited condensed consolidated financial statements.
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BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Results of Operations
Consolidated Three Months Ended September 30, 2015March 31, 2016 Compared to Consolidated Three Months Ended September 30, 2014March 31, 2015
The following presents a discussion of consolidated operations for the three months ended September 30, 2015,March 31, 2016, compared with the consolidated three months ended September 30, 2014.March 31, 2015.
| Three Months Ended | Three Months Ended | |||||||||||||||
| September 30, 2015 | September 30, 2014 | March 31, 2016 | March 31, 2015 | |||||||||||||
| Sales | ||||||||||||||||
| Domestic sales | $ | 17,185 | $ | 17,640 | $ | 19,617 | $ | 18,323 | ||||||||
| International sales | 22,071 | 26,430 | 18,590 | 23,558 | ||||||||||||
| Total sales | 39,256 | 44,070 | 38,207 | 41,881 | ||||||||||||
| Cost of goods sold | 25,113 | 26,728 | 27,253 | 27,060 | ||||||||||||
| Gross profit | 14,143 | 17,342 | 10,954 | 14,821 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | 14,243 | 15,945 | 14,229 | 15,085 | ||||||||||||
| Restructuring charge | 696 | 2,180 | 462 | 468 | ||||||||||||
| Transaction costs | 39 | - | 136 | 164 | ||||||||||||
| Total operating expenses | 14,978 | 18,125 | 14,827 | 15,717 | ||||||||||||
| Operating loss | (835 | ) | (783 | ) | (3,873 | ) | (896 | ) | ||||||||
| Other (expense) income | ||||||||||||||||
| Interest expense, net | (705 | ) | (650 | ) | (714 | ) | (686 | ) | ||||||||
| Other, net | 696 | (774 | ) | 436 | (477 | ) | ||||||||||
| Total other expense, net | (9 | ) | (1,424 | ) | (278 | ) | (1,163 | ) | ||||||||
| Loss before income tax | (844 | ) | (2,207 | ) | ||||||||||||
| Income tax expense (benefit) | 48,382 | (1,045 | ) | |||||||||||||
| Loss from continuing operations before income tax | (4,151 | ) | (2,059 | ) | ||||||||||||
| Income tax benefit | (138 | ) | (314 | ) | ||||||||||||
| Loss from continuing operations | (49,226 | ) | (1,162 | ) | (4,013 | ) | (1,745 | ) | ||||||||
| Discontinued operations, net of tax | 1,107 | 21,565 | - | 70 | ||||||||||||
| Net (loss) income | $ | (48,119 | ) | $ | 20,403 | |||||||||||
| Net loss | $ | (4,013 | ) | $ | (1,675 | ) | ||||||||||
Sales
Consolidated sales decreased $4,814,$3,674, or 10.9%8.8%, to $39,256$38,207 during the three months ended September 30, 2015,March 31, 2016, compared to consolidated sales of $44,070$41,881 during the three months ended September 30, 2014.March 31, 2015. The decrease in sales was primarily attributable to a decrease in sales of $2,441$2,145 due to the weakening of foreign currencies against the U.S. dollar during the three months ended September 30, 2015March 31, 2016 compared to the prior period and a decrease in the quantity of new and existing climb and ski products sold during the period.
Consolidated domestic sales decreased $455,increased $1,294, or 2.6%7.1%, to $17,185$19,617 during the three months ended September 30, 2015,March 31, 2016, compared to consolidated domestic sales of $17,640$18,323 during the three months ended September 30, 2014.March 31, 2015. The decreaseincrease in domestic sales was primarily attributable to a decreasean increase in the quantity of new and existing climb and ski products sold during the period, which was partially offset by an increase in mountain products sold during the period.
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BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Consolidated international sales decreased $4,359,$4,968, or 16.5%21.1%, to $22,071$18,590 during the three months ended September 30, 2015,March 31, 2016, compared to consolidated international sales of $26,430$23,558 during the three months ended September 30, 2014.March 31, 2015. The decrease in international sales was primarily attributable to a decrease in sales of $2,441$2,145 due to the weakening of foreign currencies against the U.S. dollar during the three months ended September 30, 2015March 31, 2016 compared to the prior period and a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period.
Cost of Goods Sold
Consolidated cost of goods sold decreased $1,615,increased $193, or 6.0%0.7%, to $25,113$27,253 during the three months ended September 30, 2015,March 31, 2016, compared to consolidated cost of goods sold of $26,728$27,060 during the three months ended September 30, 2014.March 31, 2015. The decreaseincrease in cost of goods sold was primarily attributable to a decreasean increase in sales.the number of units sold.
Gross Profit
Consolidated gross profit decreased $3,199,$3,867, or 18.4%26.1%, to $14,143$10,954 during the three months ended September 30, 2015,March 31, 2016, compared to consolidated gross profit of $17,342$14,821 during the three months ended September 30, 2014.March 31, 2015. Consolidated gross margin was 36.0%28.7% during the three months ended September 30, 2015,March 31, 2016, compared to a consolidated gross margin of 39.4%35.4% during the three months ended September 30, 2014.March 31, 2015. Consolidated gross margin during the three months ended September 30, 2015,March 31, 2016, decreased compared to the prior year due to the weakening of foreign currencies against the U.S. dollar during the three months ended September 30, 2015March 31, 2016 compared to the prior period.period, additional costs associated with the continued ramping-up of the Company’s manufacturing activities that were transferred from China to the United States, and the write-off of inventory shipped to certain North American accounts during the first quarter of 2016 that filed for bankruptcy reorganization in April 2016.
Selling, General and Administrative
Consolidated selling, general, and administrative expenses decreased $1,702,$856, or 10.7%5.7%, to $14,243$14,229 during the three months ended September 30, 2015,March 31, 2016, compared to consolidated selling, general, and administrative expenses of $15,945$15,085 during the three months ended September 30, 2014.March 31, 2015. The decrease in selling, general and administrative expenses was attributable to the Company’s realization of savings from its restructuring plan implemented during 20142015 to further realign resources within the organization.
Restructuring Charges
Consolidated restructuring expense decreased $1,484,$6, or 68.1%1.3%, to $696$462 during the three months ended September 30, 2015,March 31, 2016, compared to consolidated restructuring expense of $2,180$468 during the three months ended September 30, 2014.March 31, 2015. Restructuring expenses incurred during the three months ended September 30, 2015,March 31, 2016, primarily related to benefits provided to employees who were or will be terminated due to the Company’s reduction-in-force as part of its continued realignment of resources within the organization.
Transaction Costs
Consolidated transaction expense increaseddecreased $28, or 17.1%, to $39$136 during the three months ended September 30, 2015,March 31, 2016, compared to consolidated transaction expensecosts of $0$164 during the three months ended September 30, 2014,March 31, 2015, which consisted of expenses related to the Company’s exploration of a full range of strategic alternatives for each of the Company’s brands.redeployment and diversification strategy.
Interest Expense, net
Consolidated interest expense, net, increased $55,$28, or 8.5%4.1%, to $705$714 during the three months ended September 30, 2015,March 31, 2016, compared to consolidated interest expense, net, of $650$686 during the three months ended September 30, 2014.March 31, 2015. The increase in interest expense, net, was primarily attributable to the increase in accretion expense associated with the Company’s 5% Senior Subordinated Notes due 2017, which accretion is being amortized utilizing the effective interest rate method.
Other, net
Consolidated other, net, increased $1,470,$913, or 189.9%191.4%, to income of $696$436 during the three months ended September 30, 2015March 31, 2016 compared to consolidated other, net loss of $774$477 during the three months ended September 30, 2014.March 31, 2015. The increase in other, net, was primarily attributable to gains on mark-to-market adjustment on non-hedged foreign currency contracts, cumulative translation adjustment gains attributable to the substantial liquidation of a foreign entity, and a decreasean increase in remeasurement lossesgains recognized on the Company’s foreign denominated accounts receivable and accounts payable.payable partially offset by losses on mark-to-market adjustments on non-hedged foreign currency contracts.
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| 21 |
BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Income Taxes
Consolidated income tax expense increased $49,427,benefit decreased $176, or 4,729.9%56.1%, to an expensea benefit of $48,382$138 during the three months ended September 30, 2015,March 31, 2016, compared to a consolidated income tax benefit of $1,045$314 during the same period in 2014.2015. The increasedecrease in tax expensebenefit is due to the Company recording an increase in itsa valuation allowance provided against a portion of $49,194 during the three months ended September 30, 2015. The change in valuation allowance resulted in a discrete charge to income tax expense of $48,335 fornet assets, because the three months ended September 30, 2015. Certain events and circumstances transpired during the three months ended September 30, 2015, which caused the Company to conclude thatultimate realization of some portionthose assets does not meet the more-likely-than-not criteria. The tax benefit recorded relates to one of the Company’s foreign jurisdictions where deferred tax assets does not satisfy the more-likely-than-not threshold.are deemed to be realizable.
Our effective income tax rate was 5,732.5%3.3% for the three months ended September 30, 2015,March 31, 2016, compared to 47.3%15.3% for the same period in 2014.2015. Factors that could cause our annual effective tax rate to differ materially from our quarterly effective tax rates include changes in the geographic mix of taxable income and discrete events that may occur. As mentioned above,There were no meaningful discrete events recorded in the change in valuation allowance resulted in a discrete charge toCompany’s effective income tax expense of $48,335rate calculation for the three months ended September 30, 2015.March 31, 2016.
Discontinued Operations
Discontinued operations decreased $20,458, or 94.9%, to income of $1,107 during the three months ended September 30, 2015, compared to discontinued operations income of $21,565 during the three months ended September 30, 2014. During the three months ended September 30, 2015, the Company recorded the activities of POC as discontinued operations. Whereas, during the three months ended September 30, 2014, theThe Company sold the assets and liabilities of GregoryPOC for $84,135$63,639 effective July 23, 2014October 7, 2015 and as a result we recognized a pre-tax gain of $39,491.$8,436. Discontinued operations decreased to $0 during the three months ended March 31, 2016, compared to discontinued operations of $70 during the three months ended March 31, 2015. There was no activity for GregoryPOC during the three months ended September 30, 2015. As a result, the decrease was due primarily to recording the gain on sale, net of tax, of $19,558 in discontinued operations in our September 30, 2014 condensed consolidated financial statements as a result of the GMP Sale.
26
BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Consolidated Nine Months Ended September 30, 2015 Compared to Consolidated Nine Months Ended September 30, 2014
The following presents a discussion of consolidated operations for the nine months ended September 30, 2015, compared with the consolidated nine months ended September 30, 2014.
| Nine Months Ended | ||||||||
| September 30, 2015 | September 30, 2014 | |||||||
| Sales | ||||||||
| Domestic sales | $ | 51,992 | $ | 46,176 | ||||
| International sales | 59,198 | 66,168 | ||||||
| Total sales | 111,190 | 112,344 | ||||||
| Cost of goods sold | 71,711 | 70,834 | ||||||
| Gross profit | 39,479 | 41,510 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative | 43,470 | 46,488 | ||||||
| Restructuring charge | 2,572 | 2,590 | ||||||
| Transaction costs | 446 | - | ||||||
| Total operating expenses | 46,488 | 49,078 | ||||||
| Operating loss | (7,009 | ) | (7,568 | ) | ||||
| Other (expense) income | ||||||||
| Interest expense, net | (2,073 | ) | (1,808 | ) | ||||
| Other, net | 346 | (626 | ) | |||||
| Total other expense, net | (1,727 | ) | (2,434 | ) | ||||
| Loss before income tax | (8,736 | ) | (10,002 | ) | ||||
| Income tax expense (benefit) | 46,075 | (3,503 | ) | |||||
| Loss from continuing operations | (54,811 | ) | (6,499 | ) | ||||
| Discontinued operations, net of tax | (430 | ) | 20,592 | |||||
| Net (loss) income | $ | (55,241 | ) | $ | 14,093 | |||
Sales
Consolidated sales decreased $1,154, or 1.0%, to $111,190 during the nine months ended September 30, 2015, compared to consolidated sales of $112,344 during the nine months ended September 30, 2014. The decrease in sales was primarily attributable to a decrease in sales of $4,760 due to the weakening of foreign currencies against the U.S. dollar during the nine months ended September 30, 2015 compared to the prior period. This decrease was offset by an increase in the quantity of new and existing climb and mountain products sold during the period, which included additional apparel products sold by Black Diamond Equipment.
Consolidated domestic sales increased $5,816, or 12.6%, to $51,992 during the nine months ended September 30, 2015, compared to consolidated domestic sales of $46,176 during the nine months ended September 30, 2014. The increase in domestic sales was primarily attributable to an increase in the quantity of new and existing mountain, climb, and ski products sold during the period, which included additional apparel products sold by Black Diamond Equipment.
27
BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Consolidated international sales decreased $6,970, or 10.5%, to $59,198 during the nine months ended September 30, 2015, compared to consolidated international sales of $66,168 during the nine months ended September 30, 2014. The decrease in international sales was primarily attributable to a decrease in sales of $4,760 due to the weakening of foreign currencies against the U.S. dollar during the nine months ended September 30, 2015 compared to the prior period and a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period.
Cost of Goods Sold
Consolidated cost of goods sold increased $877, or 1.2%, to $71,711 during the nine months ended September 30, 2015, compared to consolidated cost of goods sold of $70,834 during the nine months ended September 30, 2014. The increase in cost of goods sold was primarily attributable to an increase in the number of units sold.
Gross Profit
Consolidated gross profit decreased $2,031, or 4.9%, to $39,479 during the nine months ended September 30, 2015, compared to consolidated gross profit of $41,510 during the nine months ended September 30, 2014. Consolidated gross margin was 35.5% during the nine months ended September 30, 2015, compared to a consolidated gross margin of 36.9% during the nine months ended September 30, 2014. Consolidated gross margin during the nine months ended September 30, 2015, decreased compared to the prior year due to the weakening of foreign currencies against the U.S. dollar during the nine months ended September 30, 2015 compared to the prior period.
Selling, General and Administrative
Consolidated selling, general, and administrative expenses decreased $3,018, or 6.5%, to $43,470 during the nine months ended September 30, 2015, compared to consolidated selling, general, and administrative expenses of $46,488 during the nine months ended September 30, 2014. The decrease in selling, general and administrative expenses was attributable to the Company’s realization of savings from its restructuring plan implemented during 2014 to realign resources within the organization.
Restructuring Charges
Consolidated restructuring expense decreased $18, or 0.7%, to $2,572 during the nine months ended September 30, 2015, compared to consolidated restructuring expense of $2,590 during the nine months ended September 30, 2014. Restructuring expenses incurred during the nine months ended September 30, 2015, related to benefits provided to employees who were or will be terminated due to the Company’s reduction-in-force as part of its continued realignment of resources within the organization of $1,521, the write-off of inventory that was directly attributable to the Company’s restructuring plan of $700, and other restructuring costs of $351.
Transaction Costs
Consolidated transaction expense increased to $446 during the nine months ended September 30, 2015, compared to consolidated transaction expense of $0 during the nine months ended September 30, 2014, which consisted of expenses related to the Company’s exploration of a full range of strategic alternatives for each of the Company’s brands.
Interest Expense, net
Consolidated interest expense, net, increased $265, or 14.7%, to $2,073 during the nine months ended September 30, 2015, compared to consolidated interest expense, net, of $1,808 during the nine months ended September 30, 2014. The increase in interest expense, net, was primarily attributable to the increase in accretion expense associated with the Company’s 5% Senior Subordinated Notes due 2017, which accretion is being amortized utilizing the effective interest rate method.
Other, net
Consolidated other, net, increased to income of $346 during the nine months ended September 30, 2015 compared to consolidated other, net loss of $626 during the nine months ended September 30, 2014. The increase in other, net, was primarily attributable to gains on mark-to-market adjustments on non-hedged foreign currency contracts and cumulative translation adjustment gains, partially offset by remeasurement losses recognized on the Company’s foreign denominated accounts receivable and accounts payable.
28
BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Income Taxes
Consolidated income tax expense increased $49,578, or 1,415.3%, to an expense of $46,075 during the nine months ended September 30, 2015, compared to a consolidated income tax benefit of $3,503 during the same period in 2014. The increase in tax expense is due the Company recording an increase in its valuation allowance of $49,194 during the nine months ended September 30, 2015. The change in valuation allowance resulted in a discrete charge to income tax expense of $48,335 for the three months ended September 30, 2015. Certain events and circumstances transpired during the three months ended September 30, 2015, which caused the Company to conclude that realization of some portion of deferred tax assets does not satisfy the more-likely-than-not threshold.
Our effective income tax rate was 527.4% for the nine months ended September 30, 2015, compared to 35.0% for the same period in 2014. Factors that could cause our annual effective tax rate to differ materially from our quarterly effective tax rates include changes in the geographic mix of taxable income and discrete events that may occur. As mentioned above, the change in valuation allowance resulted in a discrete charge to income tax expense of $48,335 for the nine months ended September 30, 2015.
Discontinued Operations
Discontinued operations decreased $21,022, or 102.1%, to loss of $430 during the nine months ended September 30, 2015, compared to discontinued operations income of $20,592 during the nine months ended September 30, 2014. During the nine months ended September 30, 2015, the Company recorded the activities of POC as discontinued operations. Whereas, during the nine months ended September 30, 2014, the Company sold the assets and liabilities of Gregory for $84,135 effective July 23, 2014 and as a result we recognized a pre-tax gain of $39,491. There was no activity for Gregory during the nine months ended September 30, 2015. As a result, the decrease was due primarily to recording the gain on sale, net of tax, of $19,558 in discontinued operations in our September 30, 2014 condensed consolidated financial statements as a result of the GMP Sale.March 31, 2016.
Liquidity and Capital Resources
Consolidated Nine months ended September 30, 2015Three Months Ended March 31, 2016 Compared to Consolidated Nine months ended September 30, 2014Three Months Ended March 31, 2015
The following presents a discussion of cash flows for the consolidated ninethree months ended September 30,March 31, 2015, compared with the consolidated ninethree months ended September 30, 2014.March 31, 2015. Our primary ongoing funding requirements are for working capital, expansion of our operations and general corporate needs, as well as investing activities associated with the expansion into new product categories. We plan to fund our future expansion of operations and investing activities through a combination of our future operating cash flows, revolving credit facility, and the net proceeds from the sale of GMP and POC. We believe that our liquidity requirements for at least the next 12 months will be adequately covered by existing cash, marketable securities, cash provided by operations and our existing revolving credit facility. At September 30, 2015,March 31, 2016, we had total cash of $26,528 ($255 included in assets held for sale)$86,335 and marketable securities of $9,235,$9,910, compared with a cash balance of $31,034 ($1,246 included in assets held for sale)$88,401 and marketable securities of $9,902$9,824 at December 31, 2014,2015, which was substantially all controlled by the Company’s U.S. entities. At September 30, 2015,March 31, 2016, the Company had $563$13,974 of the $26,528$86,335 in cash held by foreign entities; however, thisentities, of which $392 is considered permanently reinvested. The cash held by foreign entities is available for repatriation without significantand would result in an estimated tax consequence.liability of $3,696. This tax liability could be offset by the Company’s net operating loss carryforwards.
| Nine Months Ended | Three Months Ended | |||||||||||||||
| September 30, 2015 | September 30, 2014 | March 31, 2016 | March 31, 2015 | |||||||||||||
| Net cash used in operating activities | $ | (4,895 | ) | $ | (31,000 | ) | ||||||||||
| Net cash (used in) provided by investing activities | (2,038 | ) | 78,745 | |||||||||||||
| Net cash provided by (used in) financing activities | 2,563 | (9,743 | ) | |||||||||||||
| Net cash provided by (used in) operating activities | $ | 1,031 | $ | (2,973 | ) | |||||||||||
| Net cash used in investing activities | (1,506 | ) | (664 | ) | ||||||||||||
| Net cash used in financing activities | (1,662 | ) | (451 | ) | ||||||||||||
| Effect of foreign exchange rates on cash | (136 | ) | 313 | 71 | (103 | ) | ||||||||||
| Change in cash | (4,506 | ) | 38,315 | (2,066 | ) | (4,191 | ) | |||||||||
| Cash, beginning of period | 31,034 | 4,478 | 88,401 | 31,034 | ||||||||||||
| Cash, end of period | $ | 26,528 | $ | 42,793 | $ | 86,335 | $ | 26,843 | ||||||||
29 Net Cash From Operating Activities
Consolidated net cash provided by operating activities was $1,031 during the three months ended March 31, 2016, compared to consolidated net cash used in operating activities of $2,973 during the three months ended March 31, 2015. The increase in net cash provided by operating activities during 2016 is primarily due to a decrease in net operating assets or non-cash working capital of $7,050 during the three months ended March 31, 2016, compared to the same period in 2015.
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BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Net Cash From Operating Activities
Consolidated net cash used in operating activities was $4,895 during the nine months ended September 30, 2015, compared to consolidated net cash used in operating activities of $31,000 during the nine months ended September 30, 2014. The decrease in net cash used in operating activities during 2015 is primarily due to a decrease in net operating assets or non-cash working capital of $29,674 during the nine months ended September 30, 2015, compared to the same period in 2014.
Free cash flow, defined as net cash used inprovided by (used in) operating activities less capital expenditures, was free cash flows usedprovided of $7,209$428 during the ninethree months ended September 30, 2015March 31, 2016 compared to free cash flows used of $33,399$3,707 during the same period in 2014.2015. The Company believes that the non-GAAP measure, free cash flow, provides an understanding of the capital required by the Company to expand its asset base. A reconciliation of free cash flows to comparable GAAP financial measures is set forth below:
| Nine Months Ended | Three Months Ended | |||||||||||||||
| September 30, 2015 | September 30, 2014 | March 31, 2016 | March 31, 2015 | |||||||||||||
| Net cash used in operating activities | $ | (4,895 | ) | $ | (31,000 | ) | ||||||||||
| Net cash provided by (used in) operating activities | $ | 1,031 | $ | (2,973 | ) | |||||||||||
| Purchase of property and equipment | (2,314 | ) | (2,399 | ) | (603 | ) | (734 | ) | ||||||||
| Free cash flow | $ | (7,209 | ) | $ | (33,399 | ) | $ | 428 | $ | (3,707 | ) | |||||
Net Cash From Investing Activities
Consolidated net cash used in investing activities was $2,038$1,506 during the ninethree months ended September 30, 2015,March 31, 2016, compared to consolidated net cash provided byused in investing activities of $78,745$664 during the ninethree months ended September 30, 2014.March 31, 2015. The increase in cash providedused during the ninethree months September 30, 2014 relatesended March 31, 2016 is due to a purchase price adjustment related to the $81,140 of net proceeds we received forPOC sale that were paid during the sale of Gregory.three months ended March 31, 2016.
Net Cash From Financing Activities
Consolidated net cash provided byused in financing activities was $2,563$1,662 during the ninethree months ended September 30, 2015,March 31, 2016, compared to consolidated cash used in financing activities of $9,743$451 during the ninethree months ended September 30, 2014.March 31, 2015. The cash used during the ninethree months ended September 30, 2014March 31, 2016 relates to the debt payments made using the proceeds from the GMP Sale.repurchase of its common stock. The cash providedused during the ninethree months ended September 30,March 31, 2015 was primarily a result of net borrowing on the foreign credit facilities.
Net Operating Loss
As of December 31, 2014,2015, the Company had net operating loss, research and experimentation credit and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $167,303$166,206 ($294 relates to excess tax benefits related to share based payment compensation, which will not be realized until an income tax payable exists), $1,337$1,408 and $56, respectively. To the extent the Company has future taxable income, theThe Company believes its U.S. Federal net operating loss (“NOL”) will substantially offset its future U.S. Federal income taxes, excluding the amount subject to U.S. Federal Alternative Minimum Tax (“AMT”). AMT is calculated as 20% of AMT income. For purposes of AMT, a maximum of 90% of income is offset by available NOLs. The majority of the Company’s pre-tax income is currently earned and expected to be earned in the U.S., or taxed in the U.S. as Subpart F income and will be offset with the NOL. $165,912 of net operating losses available to offset taxable income does not expire until 2021 or later, subject to compliance with Section 382 of the Internal Revenue Code of 1986, as amended.
As of December 31, 2014,2015, the Company’s gross deferred tax asset was $73,465.$71,288. The Company hadhas recorded a valuation allowance of $16,081,$62,915, resulting in a net deferred tax asset of $57,384,$8,373, before deferred tax liabilities of $21,644.$17,342. The Company has provided a valuation allowance against a portion of the net deferred tax assets as of December 31, 2014,2015, because the ultimate realization of those assets does not meet the more likely than not criteria. The need for a valuation allowance is reassessed at each interim reporting period. Duringmajority of the three months ended September 30, 2015, the Company recorded an increase to its valuation allowance of $49,194. The change in valuation allowance resulted in a discrete charge to income tax expense of $48,335 for the three and nine months ended September 30, 2015. Certain events and circumstances transpired during the three months ended September 30, 2015, which caused the Company to conclude that the realization of some portion of itsCompany’s deferred tax assets does not satisfy the more-likely-than-not threshold. As partconsist of net operating loss carryforwards for federal tax purposes. If a change in control were to occur, these could be limited under Section 382 of the POC Disposition that occurred on October 7, 2015, the assets and liabilitiesInternal Revenue Code of POC have been segregated and reported1986 (“Code”), as held for sale as of September 30, 2015 and December 31, 2014. The POC Disposition removed a substantial portion of the Company’s projected future taxable income. Additionally, during the three months ended September 30, 2015, the Company made the decision to scale back its apparel initiative and announced a realignment of resources. The totality of these events and circumstances impedes management’s ability to forecast future long-term taxable income to the extent that it does not meet the more likely than not threshold.
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BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)amended.
Revolving Credit Facility
On October 31, 2014, the Company together with its direct and indirect domestic subsidiaries entered into a second amended and restated loan agreement (the “Second Amended and Restated Loan Agreement”) with Zions First National Bank (the “Lender”), which matures on April 1, 2017. Under the Second Amended and Restated Loan Agreement, the Company has a $20,000$30,000 revolving line of credit (the “Revolving Line of Credit”) pursuant to a second amended and restated promissory note (revolving loan) (the “Revolving Line of Credit Promissory Note”) andwhich is inclusive of a $10,000 accordion option (the “Accordion”) available to the Company to increase the Revolving Line of Credit on a seasonal or permanent basis for funding general corporate needs including working capital, capital expenditures, permitted loans or investments in subsidiaries, and the issuance of letters of credit. Also pursuant to the Second Amended and Restated Loan Agreement, the Company terminated its outstanding term loan facility which previously allowed the Company to borrow up to $10,000 and certain additional changes were made to the original amended and restated loan agreement and the covenants contained therein.
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BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
All debt associated with the Second Amended and Restated Loan Agreement bears interest at one-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin as determined by the ratio of Total Senior Debt to Trailing Twelve Month EBITDA as follows: (i) one month LIBOR plus 4.00% per annum at all times that Total Senior Debt to Trailing Twelve Month EBITDA ratio is greater than or equal to 2.00; (ii) one month LIBOR plus 3.00% per annum at all times that Total Senior Debt to Trailing Twelve Month EBITDA ratio is greater than 1.00 and less than 2.00; and (iii) one month LIBOR plus 2.00% per annum at all times that Total Senior Debt to Trailing Twelve Month EBITDA ratio is less than 1.00 or if the Company has cash or marketable securities equal to or greater than $30,000. The Second Amended and Restated Loan Agreement requires the payment of any unused commitment fee of (i) .6% per annum at all times that Total Senior Debt to Trailing Twelve Month EBITDA ratio is greater than or equal to 2.00; (ii) .5% per annum at all times that Total Senior Debt to Trailing Twelve Month EBITDA ratio is greater than 1.00 and less than 2.00; and (iii) .4% per annum at all times that Total Senior Debt to Trailing Twelve Month EBITDA ratioration is less than 1.00.
The Second Amended and Restated Loan Agreement contains certain restrictive debt covenants that require the Company and its subsidiaries to maintain an EBITDA based minimum Trailing Twelve Month EBITDA, a minimum net worth, a positive amount of asset coverage, and limitations on capital expenditures all as calculated in the Second Amended and Restated Loan Agreement. In addition, the Second Amended and Restated Loan Agreement contains covenants restricting the Company and its subsidiaries from pledging or encumbering their assets, with certain exceptions, and from engaging in acquisitions other than acquisitions permitted by the Second Amended and Restated Loan Agreement. The Second Amended and Restated Loan Agreement contains customary events of default (with grace periods where customary) including, among other things, failure to pay any principal or interest when due; any materially false or misleading representation, warranty, or financial statement; failure to comply with or to perform any provision of the Second Amended and Restated Loan Agreement; and default on any debt or agreement in excess of certain amounts.
On November 9, 2015, the Company together with its direct and indirect domestic subsidiaries entered into a first amendment (the “Amendment”“First Amendment”) to the Second Amended and Restated Loan Agreement.Agreement with the Lender. Pursuant to the First Amendment the minimum net worth financial covenant required to be maintained by the Company and each of its domestic wholly-owned subsidiaries was reduced and certain additional changes were also made to the Second Amended and Restated Loan Agreement.
On March 11, 2016, the Company together with its direct and indirect domestic subsidiaries entered into a second amendment (the “Second Amendment”) to the Second Amended and Restated Loan Agreement as amended by the First Amendment with the Lender. Pursuant to the Second Amendment the minimum net worth financial covenant required to be maintained by the Company and each of its domestic wholly-owned subsidiaries for the year ending December 31, 2015 was reduced from $240,000$170,000 to $170,000,$140,000 with an annual increase of $2,000 for each fiscal year thereafter, and certain additional changes were also made to the Second Amended and Restated Loan Agreement.
5% Senior Subordinated Notes due May 28, 2017
As part of the consideration payable to the stockholders of Gregory when the Company acquired Gregory, the Company issued $14,517, $7,539, and $554 in 5% Unsecured Subordinated Notes due May 28, 2017 (the “Merger Consideration Subordinated Notes”) to Kanders GMP Holdings, LLC, Schiller Gregory Investment Company, LLC, and five former employees of Gregory, respectively. Mr. Warren B. Kanders, the Company’s Executive Chairman and a member of its Board of Directors, is a majority member and a trustee of the manager of Kanders GMP Holdings, LLC. The sole manager of Schiller Gregory Investment Company, LLC is Mr. Robert R. Schiller, the Company’s Executive Vice Chairman and a member of its Board of Directors. The principal terms of the Merger Consideration Subordinated Notes are as follows: (i) the principal amount is due and payable on May 28, 2017 and is prepayable by the Company at any time; (ii) interest will accrue on the principal amount at the rate of 5% per annum and shall be payable quarterly in cash; (iii) the default interest rate shall accrue at the rate of 10% per annum during the occurrence of an event of default; and (iv) events of default, which can only be triggered with the consent of Kanders GMP Holdings, LLC, are: (a) the default by the Company on any payment due under a Merger Consideration Subordinated Note; (b) the Company’s failure to perform or observe any other material covenant or agreement contained in the Merger Consideration Subordinated Notes; or (c) the Company’s instituting or becoming subject to a proceeding under the Bankruptcy Code (as defined in the Merger Consideration Subordinated Notes). The Merger Consideration Subordinated Notes are junior to all senior indebtedness of the Company, except that payments of interest continue to be made under the Merger Consideration Subordinated Notes as long as no event of default exists under any senior indebtedness.
Given the below market interest rate for comparably secured notes and the relative illiquidity of the Merger Consideration Subordinated Notes, we have discounted the notes to $8,640, $4,487 and $316, respectively, at the date of acquisition. We are accreting the discount on the Merger Consideration Subordinated Notes to interest expense using the effective interest method over the term of the Merger Consideration Subordinated Notes.
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BLACK DIAMOND, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
On April 7, 2011, Schiller Gregory Investment Company, LLC transferred its Merger Consideration Subordinated Note in equal amounts to the Robert R. Schiller Cornerstone Trust and the Deborah Schiller 2005 Revocable Trust. On June 24, 2013, the Robert R. Schiller Cornerstone Trust dated September 9, 2010 transferred its Merger Consideration Subordinated Note in the amount of $3,769 to the Robert R. Schiller 2013 Cornerstone Trust dated June 24, 2013. During the three and nine months ended September 30, 2015,March 31, 2016, $181 and $544 in interest was paid to Kanders GMP Holdings, LLC, respectively, and $95 and $283$94 in interest respectively, was paid to the Robert R. Schiller 2013 Cornerstone Trust and the Deborah Schiller 2005 Revocable Trust pursuant to the outstanding Merger Consideration Subordinated Notes.
On May 29, 2012 and August 13, 2012, five former employees of Gregory exercised certain sales rights and sold Merger Consideration Subordinated Notes in the aggregate principal amount of approximately $365 to Kanders GMP Holdings, LLC and in the aggregate principal amount of approximately $189 to Schiller Gregory Investment Company, LLC. During the three and nine months ended September 30, 2015,March 31, 2016, $5 and $14 in interest was paid to Kanders GMP Holdings, LLC, respectively, and $2 and $7 in interest respectively, was paid to Schiller Gregory Investment Company, LLC, pursuant to these outstanding Merger Consideration Subordinated Notes.
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, 2014.2015.
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 OfficerChairman 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 of 1934, as amended (“Exchange Act”)) as of September 30, 2015,March 31, 2016, 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 OfficerChairman and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2015,March 31, 2016, were 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, 2015,March 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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BLACK DIAMOND, INC.
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.There is a reasonable possibility of loss from contingencies in excess of the amounts accrued by the Company in the accompanying condensed consolidated balance sheets; however, the actual amounts of such possible losses cannot currently be reasonably estimated by the Company at this time. It is possible that, as additional information becomes available, the impact on the Company 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. 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.
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, 2014.2015.
ITEM 5. OTHER INFORMATION2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Peter Metcalf – RetirementUnregistered Sales of Equity Securities
Mr. Peter Metcalf providedThe Company did not sell any securities during the Company with notice, which became effective on November 5, 2015,quarter ended March 31, 2016 that he will voluntarily terminate his Employment Agreement, datedwere not registered under the Securities Act of 1933, as of June 5, 2013, with the Company and will retire as the Company’s Chief Executive Officer effective as of December 31, 2015. In connection therewith, Mr. Metcalf has provided a general release of the Company, and will not compete with the Company for a period of five years after the effective date of his retirement as the Company’s Chief Executive Officer.amended.
Warren B. Kanders – Principal Executive Officer
Following the retirementIssuer Repurchases of Mr. Metcalf effective on December 31, 2015, Mr. Warren B. Kanders is expected to serve as the Company’s principal executive officer. Mr. Kanders, who is 58 years of age, has served as one of our directors since June 2002 and as Executive Chairman of our Board of Directors since December 2002. Since 1990, Mr. Kanders has served as the President of Kanders & Company, Inc., a private investment firm principally owned and controlled by Mr. Kanders, that makes investments in and provides consulting services to public and private entities. From January 1996 until its sale to BAE Systems plc on July 31, 2007, Mr. Kanders served as the Chairman of the Board of Directors, and as the Chief Executive Officer from April 2003, of Armor Holdings, Inc., formerly a New York Stock Exchange-listed company and a manufacturer and supplier of military vehicles, armored vehicles and safety and survivability products and systems to the aerospace and defense, public safety, homeland security and commercial markets. Since 2012, Mr. Kanders has served as the Chairman of the Board of Directors and as the Chief Executive Officer of Maui Acquisition Corp., the sole equity owner of Safariland, LLC, a manufacturer and supplier of safety and survivability products to the public safety, homeland security and commercial markets. Mr. Kanders graduated with an A.B. degree in Economics from Brown University. Mr. Kanders also serves on the board of trustees of the Whitney Museum of American Art, the Winston Churchill Foundation and the Hospital for Special Surgery, and is a member of the Advisory Council of The Institute at Brown for Environment and Society. Mr. Kanders also was a former trustee of the Choate Rosemary Hall School.
33
BLACK DIAMOND, INC.
Amendment No. 1 to Second Amended and Restated Loan AgreementEquity Securities
On November 9, 2015, the Company together withannounced that its direct and indirect domestic subsidiaries entered intoBoard of Directors authorized a stock repurchase program that allows the repurchase of up to $30,000,000 of the Company’s outstanding common stock. During the first amendment (the “Amendment”) to the second amended and restated loan agreement dated as of October 31, 2014 (the “Loan Agreement”) with Zions First National Bank (the “Lender”). Pursuant to the Amendment the minimum net worth financial covenant required to be maintained byquarter 2016, the Company and eachpurchased 360,221 shares of its domestic wholly-owned subsidiariesthe Company’s common stock for $1,517,842 under the year ending December 31, 2015 was reduced from $240,000 to $170,000, with an annual increase of $2,000 for each fiscal year thereafter, and certain additional changes were also made to the Loan Agreement.Company’s authorized stock repurchase program.
A copy of the Amendment is attached to this Quarterly Report on Form 10-Q as Exhibit 10.1 and is incorporated herein by reference as though fully set forth herein. The foregoing summary description of the Amendment is not intended to be complete and is qualified in its entirety by the complete text of the Amendment.
34
| 26 |
BLACK DIAMOND, INC.
| Total Number of Shares | Maximum Dollar Value | |||||||||||||||
| Purchased as Part of | of Shares that May Yet | |||||||||||||||
| Total Number of | Average Price Paid | Publicly Announced | Be Purchased Under | |||||||||||||
| Shares Purchased | per Share | Plans or Programs | the Plans or Programs | |||||||||||||
| Period | ||||||||||||||||
| January 1 to 31, 2016 | 345,254 | $ | 4.22 | 1,929,648 | 21,410,738 | |||||||||||
| February 1 to 29, 2016 | 13,867 | $ | 4.12 | 1,943,515 | 21,353,626 | |||||||||||
| March 1 to 31, 2016 | 1,100 | $ | 4.38 | 1,944,615 | 21,348,810 | |||||||||||
| Total | 360,221 | |||||||||||||||
| 27 |
BLACK DIAMOND, INC.
| 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. ** | |
| 101.INS | XBRL Instance Document * | |
| 101.SCH | XBRL Taxonomy Extension Schema Document * | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document * | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document * | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document * | |
| * | Filed herewith | |
| ** | Furnished herewith |
35
| 28 |
BLACK DIAMOND, INC.
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 thereunto duly authorized.
| BLACK DIAMOND, INC. | |||
| Date: | By: | /s/ | |
| Name: | |||
Title: Chairman | |||
| (Principal Executive Officer) | |||
| By: | /s/ Aaron J. Kuehne | ||
| Name: Aaron J. Kuehne | |||
Title: Chief Financial Officer | |||
| (Principal Financial Officer) | |||
| (Principal Accounting Officer) |
36
| 29 |
BLACK DIAMOND, INC.
| 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. ** | |
| 101.INS | XBRL Instance Document * | |
| 101.SCH | XBRL Taxonomy Extension Schema Document * | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document * | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document * | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document * | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document * | |
| * | Filed herewith | |
| ** | Furnished herewith |
| 30 |