Black Diamond Q3 Sales Rise on Apparel, Gregory Japan Sales

PEIPS recall triggers $1.5 million charge 
Gross margin was 37.3 percent in the third quarter of 2013 compared to 37.9 percent in the year-ago quarter. Gross profit in the third quarter of 2013 included a $1.5 million charge for a PIEPS product recall, of which $1.1 million was non-cash and includes 100 percent of existing inventory. Excluding this amount, adjusted gross margin improved 10 basis points to 40.2 percent compared to adjusted gross margin of 40.1 percent in the year-ago quarter.

 

 

The increase in adjusted gross margin was primarily due to a favorable mix of higher margin products and channel distribution.

 

Net loss in the third quarter of 2013 was $1.3 million, or $(0.04) per diluted share, compared to net income of $0.7 million, or $0.02 per diluted share, in the year-ago quarter. Net loss in the third quarter of 2013 included $4.6 million of non-cash items and $0.2 million of merger and integration costs compared to $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 in the year-ago quarter. Excluding these items, adjusted net income before non-cash items in the third quarter of 2013 was $3.5 million, or $0.11 per diluted share, compared to income of $5.5 million, or $0.17 per diluted share, in the third quarter of 2012.

 

At Sept. 30, 2013, cash totaled $4.4 million compared to $5.1 million at Dec. 31, 2012. Non-cash working capital was $74.6 million at Sept. 31, 2013 compared to $73.2 million at Dec. 31, 2012. Total debt was $46.0 million at Sept. 31, 2013, which included $14.4 million outstanding on the company's $30.0 million line of credit, leaving $15.6 million available. This compares to total debt of $40.5 million at Dec. 31, 2012.

“Our third quarter results represent the first half of Black Diamond's fall/winter selling season and they are consistent with our current expectations for the second half of 2013, as well as our preliminary view of 2014,” said Peter Metcalf, president and CEO of Black Diamond. “Sales during the quarter benefited from the September launch of Black Diamond apparel, which has generated an excellent response from our retail partners. This limited launch is now present in approximately 240 of our best retail doors and includes approximately 25 styles and 440 SKUs. We have also continued to realize the benefits of owning our own distribution in Japan, both through comparable sales growth and enhanced margins from selling direct.

Consistent with recent industry trends, in some product categories, third quarter sales were limited by both the timing of certain product shipments which occurred in early October, as well as general early season softness for hard goods in the marketplace, Metcalf said.

 

“We also made the decision late in the quarter to recall PIEPS' Vector avalanche transceiver product,” Metcalf said. “Recalls are not extraordinary in our industry and from time-to-time certain products may fail to adhere to the strict quality standards we instill at Black Diamond. Excluding the financial impact of the recall, gross margins were also on track with our expectations for 2013.”

Black Diamond hired a leading consulting firm during the quarter to conduct a global profitability study across all product categories and geographies. The company will integrate conclusions from the study into its long-term thinking about the depth and breadth of certain categories and geographies. Metcalf said the company continues to get a better sense of  the cost of a single SKU, which will enhance its efforts to drive better marginal profitability in the out years and enhance working capital.

“We are acknowledging the Black Diamond and POC brands as our fastest growing assets and worthy of investment to accelerate our organic growth. More specifically, we believe that our Black Diamond apparel and POC lifestyle businesses display extraordinary growth potential and that over time they are likely our most efficient and cost-effective use of capital.”

“To help us achieve this strategic pivot, we've retained an executive search firm to find a senior executive leadership candidate that would augment our strategic capabilities in lifestyle brand management and general management, specifically in the areas of apparel, retail and e-commerce.

“As we look out into the future-into 2015 and beyond-we understand and believe that retail and e-commerce will likely drive additional investment. We continue to believe that we can fund these initiatives from our existing balance sheet and from our existing operations. At this time, we have no plans to access the capital markets and we will continue to explore the waterfront of strategic alternatives to facilitate the acceleration of our investment for the future. Ultimately, we expect this rationalization process and product mix shift to manifest itself into healthy, organic growth and improved margins in the out years.”
 

BLACK DIAMOND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
	Three Months Ended
	September 30, 2013	September 30, 2012
Sales
Domestic sales	$ 19,811	$ 19,128
International sales	32,965	29,614
Total sales	52,776	48,742
Cost of goods sold	33,106	30,283
Gross profit	19,670	18,459
Operating expenses
Selling, general and administrative	20,970	16,347
Restructuring charge	—	86
Merger and integration	190	76
Transaction costs	—	415
Total operating expenses	21,160	16,924
Operating (loss) income	(1,490)	1,535
Other (expense) income
Interest expense, net	(939)	(713)
Other, net	309	521
Total other expense, net	(630)	(192)
(Loss) income before income tax	(2,120)	1,343
Income tax (benefit) expense	(814)	617
Net (loss) income	$ (1,306)	$ 726