Black Diamond Inc. reported sales in the fourth quarter of 2016 were $41.4 million compared to $44.1 million in the same year-ago quarter.

Excluding the impact of foreign exchange, sales were down 2 percent. This was due to unseasonably dry European winter conditions impacting ski product sales and the company’s measured approach to scaling back its apparel line, partially offset by continued strong climb and mountain equipment product growth.

Gross margin in the fourth quarter was 29.1 percent compared to 33.5 percent in the year-ago quarter. Foreign currency headwinds accounted for 290 basis points of this decline. Excluding the impact of foreign exchange, gross margin was 32.0 percent. Gross margin was also impacted by a combination of an unfavorable mix of lower margin products and costs associated with Black Diamond’s recently repatriated manufacturing activities from Asia to the U.S.

Selling, general and administrative expenses in the fourth quarter decreased 16 percent to $12.6 million compared to $15.0 million in the year-ago quarter. The decline was due to the company’s continued realization of savings from its restructuring plan implemented in 2015 to realign resources within the organization.

Net loss from continuing operations in the fourth quarter was $1.4 million or $(0.05) per diluted share, compared to a net loss from continuing operations of $31.7 million or $(0.99) per diluted share in the year-ago quarter. Net loss from continuing operations in the fourth quarter of 2016 included $1.7 million of non-cash items and $0.1 million in restructuring and transaction costs. In addition, the year-ago quarter included a $29.5 million goodwill impairment charge, which was required due to the decline in the company’s market capitalization in the fourth quarter of 2015.

Adjusted net income from continuing operations, which excludes the non-cash items and restructuring and transaction costs, was $0.4 million or $0.01 per diluted share in the fourth quarter of 2016, compared to an adjusted net income from continuing operations before non-cash items of $0.6 million or $0.02 per diluted share in the fourth quarter of 2015.

Adjusted EBITDA was $0.3 million compared to $0.8 million in the fourth quarter of 2015, primarily due to the aforementioned factors impacting sales and gross margin.

At December 31, 2016, cash totaled $94.7 million compared to cash and marketable securities of $98.2 million at December 31, 2015. During the year, the company repurchased a total of 1.2 million shares of its common stock for $5.1 million, or approximately $4.26 per share. Total debt was $21.9 million compared to $20.1 million at December 31, 2015. Stockholders’ equity was $160.8 million or approximately $5.36 per share based on approximately 30.0 million shares of the company’s common stock outstanding as of December 31, 2016.

Subsequent to year end, on February 13, 2017, the company paid in full its 5 percent senior subordinated notes for $22.6 million. As such, the company has pro forma cash of approximately $72.1 million and $0.1 million in debt.

Full Year 2016 Financial Results

Sales in 2016 were $148.2 million compared to $155.3 million in 2015. Excluding the impact of foreign exchange, sales were essentially unchanged.

Gross margin in 2016 was 29.5 percent compared to 34.9 percent in 2015. Foreign currency headwinds accounted for 330 basis points of this decline. Excluding the impact of foreign exchange, gross margin was 32.8 percent.

Selling, general and administrative expenses in 2016 decreased 15 percent to $49.9 million compared to $58.5 million in 2015.
Net loss from continuing operations in 2016 was $9.0 million or $(0.30) per diluted share, compared to a net loss from continuing operations of $88.1 million or $(2.70) per diluted share in 2015. Net loss in 2016 included $6.8 million of non-cash items, $1.4 million in restructuring costs and $0.3 million in transaction costs, partially offset by a $2.0 million arbitral award related to certain claims against the former owner of the company’s PIEPS™ brand associated with the voluntary recall of the PIEPS VECTOR transceiver in 2013.

Adjusted net loss from continuing operations, which excludes these non-cash items as well as restructuring and transaction costs and the arbitral award, was $2.6 million or $(0.09) per diluted share, compared to an adjusted net loss from continuing operations of $0.8 million or $(0.02) per diluted share in 2015.

Adjusted EBITDA in 2016 was $(2.7) million compared to $1.1 million in 2015.

Management Commentary

“The fourth quarter was highlighted by growing retailer confidence in the core products that define the Black Diamond Equipment brand,” said John Walbrecht, Black Diamond Equipment’s brand president. “While we still faced foreign exchange headwinds and margin constraints due to our manufacturing repatriation, demand for climbing and mountain products remained strong. We also continued to experience growing momentum in our direct-to-consumer and independent global distributor businesses, as both channels continue to grow in the strong double-digits.

“After more than a year of restructuring, we believe we are poised to scale the brand in 2017 through the implementation of a clear growth plan. This entails an unwavering focus on the roots of our brand and the continued investment in the products that has made Black Diamond synonymous with the sports we’ve served for the past 28 years. We are also focused on enhancing our brand equity through innovation in adjacent product categories and targeted media impressions centered around the consumer’s experience with our products. We believe this strategy optimally positions us to achieve sales and margin expansion, along with improved levels of customer service and more efficient working capital management.”

2017 Outlook

The company anticipates its fiscal year 2017 sales to grow between 3 percent to 7 percent to approximately $153 to $158 million compared to $148.2 million in 2016. On a constant currency basis, the company expects sales to range between $154 to $159 million, or up 4 percent-7 percent compared to 2016. The company expects gross margin in fiscal 2017 to increase approximately 300 to 400 basis points and range between 32.5 percent-33.5 percent compared to 29.5 percent in 2016, with foreign currency representing an approximate 50 basis point negative impact on gross margin in 2017.

The company also expects selling, general and administrative costs, including approximately $4.5 million of cash corporate overhead expenditures, to be approximately $50.5 million compared to $49.9 million in 2016. The company expects approximately $2.5 million in capital expenditures in 2017.

Redeployment and Diversification Strategy

On November 9, 2015, the company announced that it is seeking to redeploy its significant cash balances. The company expects to invest in high-quality, durable, cash flow-producing assets potentially unrelated to the outdoor industry in order to diversify its business and potentially monetize its substantial net operating losses. The company intends to focus its search primarily in the United States, while also evaluating international investment opportunities should it find such opportunities attractive.

Net Operating Loss (NOL)

The company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $172 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 the Internal Revenue Code of 1986, as amended. 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.

Photo courtesy Black Diamond