Black Diamond Acquisition Boosts Q3 Sales, Shaves Margins

The growth in sales was primarily attributed to the company's acquisition of POC in July 2012, partially offset by the impact of foreign exchange rates as well as the impact of the estimated amount of inventory that is expected to be repurchased from Black Diamond's Gregory Mountain Products (“Gregory”) Japanese distributor, Kabushiki Kaisha A&F (“A&F”), as part of the A&F distribution agreement, for which revenue is not able to be recognized.

Gross margin in the third quarter of 2012 was 37.9 percent, compared to 38.1 percent in the year-ago quarter. Gross margin in the third quarter of 2012 includes $1.1 million for inventory fair value of purchase accounting adjustments related to the acquisition of POC. Excluding this amount, adjusted gross margin in the third quarter of 2012 was 40.1 percent, a 200 basis point improvement compared to the year-ago quarter, due to a favorable mix in higher margin products and channel distribution as well as the inclusion of POC.

Net income in the third quarter of 2012 was $0.7 million or $0.02 per diluted share, compared to $1.0 million or $0.05 per diluted share in the year-ago quarter. Net income in the third quarter of 2012 included $4.2 million of non-cash items, $0.4 million in transaction-related costs, $0.1 million in restructuring costs and $0.1 million in merger and integration costs. Excluding these items, adjusted net income before non-cash items in the third quarter of 2012 increased 37 percent to $5.5 million, compared to $4.0 million in the third quarter of 2011. On a per share basis, adjusted net income before non-cash items decreased $0.01 to $0.17 per diluted share compared to $0.18 per diluted share in the same year-ago period, reflecting the shares issued in February 2012 in connection with the company's public offering.

Adjusted EBITDA (earnings before interest, taxes, other income, depreciation, amortization, stock-based compensation, inventory fair value of purchase accounting, and transaction, merger and integration, and restructuring costs) in the third quarter of 2012 increased 9 percent to $5.6 million, compared to $5.2 million in the year-ago quarter. Adjusted EBITDA in the third quarter of 2012 excluded $0.5 million of stock-based compensation, $1.1 million of inventory fair value of purchase accounting adjustments, and the aforementioned $0.4 million in transaction-related costs, $0.1 million in restructuring costs and $0.1 million in merger and integration costs.

At Sept. 30, 2012, cash and cash equivalents totaled $14.3 million, compared to $2.4 million at December 31, 2011. Total debt was $42.3 million at Sept. 30, 2012, which included $22.8 million outstanding on the company's $35.0 million line of credit, leaving $12.2 million available, less outstanding letters of credit.

On Oct. 1, 2012, the company completed the acquisition of PIEPS for a total consideration valued at approximately $10.3 million in cash and assumed approximately $2.7 million in debt.

In addition, on Sept. 28, 2012, Black Diamond signed a definitive agreement to acquire the Japanese distribution assets of Gregory from A&F, the exclusive distributor for Gregory in Japan. Beginning Jan. 1, 2013, Gregory intends to assume all of its own sales, marketing and distribution functions in Japan. Under the terms of the agreement, Black Diamond will acquire its Gregory Japanese distribution assets from A&F for $750,000, comprising of a $500,000 payment in January 2013 and $250,000 in December 2013.

Management commentary
“During the third quarter, Black Diamond grew sales 16 percent to a record $48.7 million, which is in-line with our expectations for the second half of 2012,” said Peter Metcalf, President and CEO of Black Diamond. “More importantly, we reached several key milestones in our overall long-term strategic plan. This includes the acquisition of POC, which effectively marked the beginning of our acquisition initiative. We agreed to acquire PIEPS which brings us valuable intellectual property and supports our focus on developing our electronic product portfolio. We subsequently closed the transaction and expect the 49 percent gross margin that PIEPS generated in their most recent fiscal year to augment our overall gross margin.”

“At the end of the quarter,” continued Metcalf, “we entered into a contract with A&F to purchase Gregory's Japanese distribution assets and have established a seasoned management team to prepare for the strategic transition in this important market. Most recently, we unveiled our apparel project to Black Diamond's major trading partners and opened our 43,000-square foot, state-of-the-art ski manufacturing factory. These investments represent the culmination of many months of strategic planning and resource commitment which, collectively, we expect to drive significant long-term growth and value for our shareholders.

 

“For the remainder of 2012, we plan to continue our investment in Black Diamond's operational platform, preparing it to support a much larger and more mature organization. Thanks to our strong team in the U.S. and Europe, we are making substantial progress on the POC integration. It is progressing according to our expectations and we have been especially pleased with our initial steps in completing the integration of PIEPS. Our achievements so far in 2012 provide us with great confidence that our growth strategy is well on track, driving shareholder value and advancing Black Diamond as one of the most respected and leading active outdoor equipment companies in the world.”

 

BLACK DIAMOND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
	THREE MONTHS ENDED
	September 30, 2012	September 30, 2011
Sales
Domestic sales	$19,128	$15,868
International sales	29,614	26,172
Total sales	48,742	42,040
Cost of goods sold	30,283	26,043
Gross profit	18,459	15,997
Operating expenses
Selling, general and administrative	16,347	12,824
Restructuring charge	86	219
Merger and integration	76	—
Transaction costs	415	—
Total operating expenses	16,924	13,043
Operating income	1,535	2,954
Other (expense) income
Interest expense	(722)	(720)
Interest income	9	5
Other, net	521	(702)
Total other expense, net	(192)	(1,417)
Income before income tax	1,343	1,537
Income tax expense	617	530
Net income	$726	$1,007
Earnings per share:
Basic	$0.02	$0.05
Diluted	0.02	0.05