Black Diamond’s Continuing Businesses Post Double-Digit Q2 Growth

Gross margin in the second quarter of 2014 was 35.9 percent compared to 36.2 percent in the year-ago quarter, with the decrease due to the mix in product and channel distribution. During the quarter, sales increased 28 percent with the company's independent global distributors. These sales are at lower average gross margins given the distributors incur all selling and distribution costs.

 

Selling, general and administrative expenses in the second quarter of 2014 increased 12 percent to $18.0 million compared to $16.1 million in the year-ago quarter, driven by investments in its 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 road cycling collection.

 

Net loss from continuing operations in the second quarter of 2014 was $4.4 million or $(0.14) per diluted share, compared to a net loss of $4.2 million or $(0.13) per diluted share in the year-ago quarter. Net loss from continuing operations in the second quarter of 2014 included $0.3 million of non-cash items and $0.4 million in restructuring costs, compared to $0.8 million of non-cash items and $0.1 million in merger and integration costs in the year-ago quarter. Excluding these items, adjusted net loss from continuing operations before non-cash items in the second quarter of 2014 was $3.7 million or $(0.11) per diluted share, compared to adjusted net loss of $3.3 million or $(0.10) per diluted share in the second quarter of 2013.

 

At June 30, 2014, cash totaled $4.6 million compared to $4.5 million at Dec. 31, 2013. Total debt was $47.3 million at June 30, 2014, which included $17.9 million outstanding on the company's $30.0 million line of credit, leaving $12.1 million available. This compares to total debt of $38.0 million at Dec. 31, 2013.

 

On July 23, 2014, the company completed the sale of Gregory Mountain Products to Samsonite LLC. Black Diamond realized $84.1 million or 2.3 times projected 2014 sales for its slowest growing and, in the opinion of the company, least valuable brand. A portion of the proceeds were used to fully pay down the company's line of credit and pay off its $9.0 million term note in full. The company expects to utilize approximately $30 million of its net operating loss carryforwards in the transaction, leaving a balance of approximately $180 million for future utilization.

 

Management commentary
“Our strong second quarter results were driven by double-digit sales growth across our Black Diamond, POC and PIEPS brands, as well as strong growth across every product category and region,” said Peter Metcalf, CEO of Black Diamond.

 

 

“We attribute these results to the successful introduction of new and innovative hard goods products, the rollout of POC's spring '14 road cycling line and the advancement of our apparel offering.

 

“Since initiating our strategic pivot in late 2013, we have executed against all of our strategic objectives, including the sale of Gregory, the hiring of a talented new president in Zeena Freeman, and the development of a series of strategic initiatives to improve margins and profitability. The sale of Gregory has simplified our business model, significantly strengthened our balance sheet, and enabled us to utilize a meaningful portion of our NOL.

 

“In connection with the long-term investment in our company, our board of directors authorized a 10 percent stock repurchase program. It is not our intention to use our balance sheet to support our stock; however, we aim to be opportunistic should the market present any unusual opportunities.”

 

“We strongly believe Black Diamond is well positioned for continued growth,” concluded Metcalf. “We are entering our second fall season since launching apparel and POC has successfully expanded its product offering from skiing into cycling. Given our outlook for 2014 and beyond, we are also confident that we will concurrently grow the business and improve margins. Perhaps most importantly, we believe that we have sufficient capital to invest in our fastest growing brands while developing a calculated omni-channel model. Given the strength of our brands and margins, we are prepared to reinvest a significant amount of our ongoing profits to support our future growth.”

 

2014 Outlook
Black Diamond has revised its fiscal year 2014 guidance to reflect the divestiture of Gregory Mountain Products. Sales from continuing operations are now expected to range between $192 million and $197 million, which would represent an increase of approximately 14 percent to 17 percent from 2013. The company also now expects gross margin from continuing operations in 2014 to range between 38.5 percent and 39.0 percent, which would represent an increase of approximately 130 to 180 basis points from 2013 pro forma amount.

 

Second half 2014 sales are expected to range between $113 million and $118 million, implying an increase of approximately 15 percent to 20 percent from the same period in 2013. The company expects gross margin to range between 39.5 percent to 40.5 percent, which would represent an increase of approximately 160 to 260 basis points from the second half of 2013 pro forma amount.

 

Net Operating Loss (NOL)
The company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $180 million. The company's common stock is subject to a Rights Agreement dated February 7, 2008, intended to assist in limiting the number of 5 percent or more owners and thus 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. There is no guaranty, however, that the Rights Agreement will achieve the objective of preserving the value of the NOLs.