Citing a strong fourth quarter performance and high valuations for premium outdoor brands, Black Diamond Inc. said Monday (March 16) that it had hired two investment banks to explore strategic options for its three brands.

The Salt Lake City company reported sales in the fourth quarter of 2014 increased 10 percent to $59.4 million compared to $54.1 million in the same year-ago quarter. The increase was primarily due to the continued growth of Black Diamond Apparel and an increase in POC's preseason bookings, as well as restocking orders for winter seasonal product. Excluding the impact of foreign exchange, sales grew by 13 percent.

Gross margin in the fourth quarter of 2014 was 39.0 percent compared to 37.4 percent in the year-ago quarter. The 160 basis point increase was primarily due to both a favorable mix of higher margin products and higher margin channel mix, partially offset by a 175 basis point impact from foreign exchange.

Selling, general and administrative expenses in the fourth quarter of 2014 increased 8 percent to $21.9 million compared to $20.2 million in the year-ago quarter. The increase was driven by investments in strategic initiatives such as the transition of certain POC distributors into the company's in-house operations and the continued roll-out of POC's new road cycling collection.

Adjusted EBITDA in the fourth quarter of 2014 increased 37 percent to $3.4 million compared to $2.5 million in the year-ago quarter.

Net loss from continuing operations in the fourth quarter of 2014 was $0.9 million or $(0.03) per diluted share, compared to net income from continuing operations of $0.5 million or $0.02 per diluted share in the year-ago quarter. Net loss from continuing operations in the fourth quarter of 2014 included $3.1 million of non-cash items and $1.0 million in restructuring costs, compared to $1.6 million of non-cash items and $0.1 million in merger and integration costs in the year-ago quarter.

Adjusted net income from continuing operations, which excludes these non-cash items, increased 36 percent to $3.1 million or $0.09 per diluted share in the fourth quarter of 2014, compared to adjusted net income from continuing operations of $2.3 million or $0.07 per diluted share in the fourth quarter of 2013.

At December 31, 2014, cash and available-for-sale marketable securities totaled $40.9 million compared to $4.5 million at December 31, 2013. Total debt was $22.4 million at December 31, 2014, which includes $18.5 million of 5 percent subordinated notes due in 2017 and $3.9 million in a foreign seasonal working capital credit facility for POC, compared to $38.0 million at December 31, 2013. The decrease in debt was due to the pay down of outstanding amounts under the company's line of credit and the full pay off of its $9.0 million term note.

Full Year 2014 Financial Results
Sales in 2014 increased 15 percent to $193.1 million compared to $168.1 million in 2013. Excluding the impact of foreign exchange, sales grew by 16 percent.

Gross margin in 2014 increased 250 basis points to 38.8 percent compared to 36.3 percent in 2013. Gross margin in 2014 included a 50 basis point negative impact from foreign exchange. Gross margin in 2013 included a $1.5 million charge for a PIEPS product recall. Excluding this amount, adjusted gross margin in 2013 was 37.2 percent.
Selling, general and administrative expenses in 2014 increased 9 percent to $81.1 million compared to $74.5 million in 2013.

Adjusted EBITDA in 2014 increased to $2.9 million compared to a loss of $1.6 million in 2013.

Net loss from continuing operations in 2014 was $9.2 million or $(0.28) per diluted share, compared to a net loss from continuing operations of $11.1 million or $(0.35) per diluted share in 2013. Net loss in 2014 included $6.6 million of non-cash items and $3.6 million in restructuring costs, compared to $7.6 million of non-cash items, $0.2 million in restructuring costs, $0.6 million in merger and integration costs, and $0.1 million in transaction costs.

Adjusted net income from continuing operations, which excludes these non-cash items, was $0.8 million or $0.03 per diluted share, compared to a loss of $2.8 million or $(0.09) per diluted share in 2013.

Management Commentary
“Since initiating our strategic pivot in late 2013, we have executed against nearly all of its objectives, including the sale of Gregory, the focus on our core and fastest growing brands, and the development of a series of initiatives to improve margins and profitability,” said Peter Metcalf, CEO of Black Diamond. “Our strong fourth quarter results reflect this execution, with 13 percent constant currency sales growth, a 160 basis point improvement in gross margin and a 37 percent increase in adjusted EBITDA.

“Black Diamond Apparel and POC continued to drive our growth as we benefited from a more complete fall 2014 apparel collection, including the fall launch of our women's line, and a significant increase in sales from POC, driven by strong preseason bookings and re-orders of winter seasonal product.”

Exploration of Strategic Alternatives
Black Diamond has engaged the financial advisory firms Rothschild Inc. and Robert W. Baird & Co. to lead the exploration of a full range of strategic alternatives for each of the company's brands, Black Diamond, POC and PIEPS.

“Over the last 15 months, we have undertaken a series of actions to leverage the significant growth in our brands, optimize our platform, drive significant cost reductions, and position the company for stronger financial and brand performance,” said Warren Kanders, executive chairman of Black Diamond. “We believe the growth in sales and margin in the fourth quarter is an early indication of the benefits of these actions, which we expect to realize increasingly over time.

“At a time when premium active lifestyle and outdoor brands are selling at historically high levels, and there is a scarcity of authentic branded assets available to strategic acquirers, the board's decision to investigate its strategic alternatives results from its belief that the company is likely to utilize 100 percent of its NOL balances in connection with this process and represents the logical next step in our ongoing efforts to unlock value for Black Diamond shareholders.”

Black Diamond has not set a timetable for completion of this strategic review process, and does not intend to comment further regarding the review process unless or until a specific transaction is approved by its board of directors or shareholders, the review process is concluded, or it is otherwise determined that further disclosure is appropriate or required by law. The company provides no assurance that the strategic review process will result in any transaction.

2015 Outlook

Black Diamond anticipates fiscal year 2015 sales of approximately $208 million, which would represent an increase of approximately 8 percent from 2014 sales (an increase of 11 percent on a constant currency basis). The company also expects gross margin in fiscal year 2015 to be approximately 40 percent.

Net Operating Loss (NOL)
The company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $167 million. The company's common stock is subject to a rights agreement dated Feb. 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.

BLACK DIAMOND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)




Three Months Ended

December 31, 2014 December 31, 2013




Sales



Domestic sales

$24,611

$22,006

International sales

34,814

32,143

Total sales

59,425

54,149




Cost of goods sold

36,234

33,886

Gross profit

23,191

20,263




Operating expenses



Selling, general and administrative

21,887

20,189

Restructuring charge

993


Merger and integration


149




Total operating expenses

22,880

20,338




Operating income (loss)

311

(75)




Other (expense) income



Interest expense, net

(731)

(675)

Other, net

128

117




Total other expense, net

(603)

(558)




Loss before income tax

(292)

(633)

Income tax expense (benefit)

635

(1,179)

(Loss) income from continuing operations

(927)

546




Discontinued operations, net of tax

841

190




Net (loss) income

$(86)

$736




(Loss) income from continuing operations per share:



Basic

$(0.03)

$0.02

Diluted

(0.03)

0.02




Net (loss) income per share:



Basic

$(0.00)

$0.02

Diluted

(0.00)

0.02