Fitness financial: Cybex litigation charge creates 3Q operating income loss

Despite showing sales growth in the third quarter and nine months ended Sept. 24, 2005, of 7 percent, Cybex had to satisfy itself with a reported loss in operating income of $2.830 million due to a litigation charge of $4.1 million. Without the charge, the company would have shown income of $1.271 million or just slightly less than the year-ago quarter.

Cybex (AMEX: CYB) has already said it is appealing the patent infringement verdict in the Colassi case where a jury awarded the plaintiff $2.5 million in damages. (See SNEWS® story, Aug. 31, 2005, “Cybex loses patent suit, plans appeal; plaintiff says he’s glad ‘truth’ is out.”) The remainder of the charge put into reserves stems from the reversal on appeal of a summary judgment in favor of the company in the Kirila patent infringement case that is ongoing.

“The state of the company at this point is sound,” CEO John Aglialoro told analysts on a quarterly call Oct. 26.

The company reported net sales for the quarter of $26.7 million, with the Arc Trainer accounting for much of that gain of 7 percent over the year-ago quarter’s sales of $25 million. Internationally sales were also up about 7 percent, with the United Kingdom being the strongest component. For the nine months, net sales were $78.6 million, compared to net sales of $73.5 million for 2004.

Aglialoro stressed the company’s entry into what he called a “fifth category” in fitness defined by the Trazer, a virtual reality device that has participants interacting with a screen to play a movement skills game. That unit is now shipping after manufacturing delays.

“With something like this you got to get it right,” Aglialoro said. “We believe we have a great new category.”

In addition, the company has begun its re-entry into the consumer equipment realm with one treadmill, a light commercial unit that has a list price of $4,500 and is just shipping the last week of October. In comparison, the company’s previously lowest price treadmill listed for $6,800.

“This is a great price point, and it will begin to work more directly with the consumer dealers,” he added.

The remaining pieces of the consumer line announced last year will begin to ship in either late 2006 or early 2007, Aglialoro said.

The VR3 strength line also began to ship after some delays that affected strength sales as customers began to wait for the new line, the company reported.

“I’m not as happy as I’d like to be,” Aglialoro said about the delays. “The pace has not been what I’d like. A lot of it has just been figuring it out. The momentum is not what I would have expected, but the products are out now.”

On a GAAP basis, the company reported a net loss for the third quarter of 2005 of $3.535 million, or a loss of $0.23 per share, and a net loss for the nine months of $2.378 million or a loss of $0.16 per share. Excluding the 3Q litigation-related charge, the company’s third-quarter 2005 pro forma net income was $566,000 or $0.04 per fully diluted share, compared to net income of $378,000, or $0.03 per share, for the corresponding 2004 period, and pro forma net income for the nine months was $1.723 million, or $0.11 per fully diluted share, compared to net income of $1.342 million, or $0.12 per fully diluted share, for the corresponding 2004 period.

Stock prices closed on the day of the report at 3.37 on a volume of 5,000.