Black Diamond Meets Third Quarter Expectations

Black Diamond Inc. reported sales in the third quarter of 2014 increased 24 percent to $54.9 million compared to $44.2 million in the same year-ago quarter. The increase was across all brands and geographies, benefiting from an increased fulfillment of preseason fall bookings. The third quarter was also highlighted by the continued delivery of POC’s road cycling collection and the launch of the Black Diamond Apparel women’s collection.

Gross margin in the third quarter ended Sept. 30 was 41.4 percent compared to 35.0 percent in the year-ago quarter. Gross margin in the year-ago quarter included a $1.5 million charge for a PIEPS product recall.

Excluding this amount, adjusted gross margin in the year-ago quarter was 38.5 percent. The 290 basis point increase was primarily due to both a favorable mix of higher margin products and higher margin channel mix.
Selling, general and administrative expenses in the third quarter of 2014 increased 6 percent to $20.4 million compared to $19.3 million in the year-ago quarter, driven by investments in strategic initiatives such as Black Diamond Apparel, the transition of certain POC distributors into the company’s in-house operations, and the launch of POC’s new road cycling collection.

Net loss from continuing operations in the third quarter of 2014 was $0.4 million or $(0.01) per diluted share, compared to a net loss from continuing operations of $3.6 million or $(0.11) per diluted share in the year-ago quarter.

Net loss from continuing operations in the third quarter of 2014 included $2.3 million of non-cash items and $2.2 million in restructuring costs, compared to $4.5 million of non-cash items and $0.2 million in merger and integration costs in the year-ago quarter. $2.0 million of the restructuring charges are non-cash charges. Adjusted net income from continuing operations, which excludes these non-cash items, increased to $4.0 million or $0.12 per diluted share in the third quarter of 2014, compared to $1.1 million or $0.03 per diluted share in the third quarter of 2013.

The results met analyst’s consensus estimates for the quarter.

At Sept. 30, 2014, cash totaled $42.8 million compared to $4.5 million at Dec. 31, 2013. Total debt was $25.6 million at Sept. 30, 2014, which includes $18.1 million of 5 percent subordinated notes due in 2017 and $7.3 million in a foreign seasonal working capital credit facility for POC, compared to $38.0 million at Dec. 31, 2013. The decrease in debt was due to the pay down of outstanding amounts under the company’s $30.0 million line of credit and the full pay off of its $9.0 million term note.

On July 23, 2014, the company completed the asset sale of its Gregory Mountain Products brand for $84.1 million to Samsonite LLC. The company recognized a pre-tax gain on the sale of Gregory Mountain Products of $39.5 million, which is presented in discontinued operations along with the associated taxes and operational activities of Gregory Mountain Products prior to the sale. The company expects to utilize approximately $31.4 million of its net operating loss carryforwards in the sale of Gregory Mountain Products, leaving a balance of approximately $179.0 million for future utilization.

Management Commentary
“Consolidated third quarter sales increased 24 percent, driven by our POC and Black Diamond brands, as well as strong fulfillment rates of both preseason fall bookings and ASAP or restocking orders,” said Peter Metcalf, CEO of Black Diamond. “This efficiency and process improvement within our supply chain, along with a higher margin product mix, also drove a positive increase in consolidated gross margin to 41.4 percent.

“Consolidated third quarter results also reflect the continued implementation of the company’s strategic pivot, the impact of the sale of Gregory, and longer term investments in POC, PIEPS and Black Diamond Apparel.”

2014 Outlook
Black Diamond reiterates its outlook for the second half and full year of 2014. Sales in the second half of 2014 are expected to range between $113 million and $118 million, increasing 15 percent to 20 percent compared to the same period in 2013. The company expects gross margin in the second half to range between 39.5 percent and 40.5 percent, which would represent an increase of 160 to 260 basis points from the second half of 2013.

Sales for the full year are expected to range between $192 million and $197 million, which would represent an increase of 14 percent to 17 percent from 2013. The company expects gross margin for the year to range between 38.5 percent and 39.0 percent, which would represent an increase of 130 to 180 basis points.
Net Operating Loss (NOL)

The company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $179 million. The company’s common stock is subject to a rights agreement dated February 7, 2008 that is intended to limit the number of 5 percent or more owners and therefore reduce the risk of a possible change of ownership under Section 382 of the Code. Any such change of ownership under these rules would limit or eliminate the ability of the company to use its existing NOLs for federal income tax purposes. However, there is no guaranty that the rights agreement will achieve the objective of preserving the value of the NOLs.