Liability Suit Affects Cybex’s 2010 and Q4 Financials

Cybex International Inc., Medway, MA, had higher net sales for fourth quarter 2010 and the full year, but it had a higher net loss for both periods, primarily due to a $66 million product liability suit, according to financials released by the company Thursday.

Net sales for the fourth quarter 2010 were $39.9 million compared to $34.8 million for the corresponding 2009 period, a 15 percent increase. The company’s net loss of $57.1 million in the fourth quarter included a $46 million pre-tax charge to reserve for an unfavorable jury verdict in the product liability suit, Barnhard v. Cybex International Inc., and a $12.7 million incremental tax provision, also ultimately caused by the litigation charge. Net income for the quarter excluding these charges would have been $1.5 million.

For the full year, net sales were $123 million compared to $120.5 million for 2009, a 2 percent increase. Despite the increase, the 2010 net sales are still 17 percent below the 2008 net sales of $147.9 million.

The company’s loss for the year was $58.2 million compared to a net loss of $2.4 million for 2009. The 2010 results included the fourth quarter litigation charge and the related tax impact, previously mentioned. Net income excluding these charges would have been $0.4 million.

In its annual report, Cybex blames the recession for the decreased sales in 2009 and 2010 compared to 2008.

“We believe that this sales decline largely reflected our customers’ caution in making capital investment decisions due to economic conditions, both generally and in the fitness industry,” the report states. “If these economic conditions persist or further deteriorate, our ability to generate future revenues and earnings and our business prospects, liquidity and financial condition could be materially adversely affected.”

According to the company’s annual report, its largest customer, after an independent authorized dealer that represented 13 percent of the company’s sales last year, was Planet Fitness Equipment LLC, which represented 12.4 percent of the company’s net sales for 2010. These customers represented 9.5 percent and 6.7 percent, respectively, of Cybex’s accounts receivable as of Dec. 31, 2010. Sales to Snap Fitness Inc. or its franchisees represented 4.1 percent of the company’s net sales in 2010 (down from 7.4 percent and 12.9 percent in 2009 and 2008, respectively). No other customer accounted for more than 10 percent of the company’s net sales for 2010, 2009 or 2008.

The Barnhard suit—in which a piece of Cybex equipment fell on a woman, rendering her a quadriplegic—is an ongoing concern for the company. In January 2011, Cybex filed post-trial motions seeking a new trial or a reduction of the verdict. In February 2011, the trial court denied these motions. Cybex then filed an appeal with the Appellate Division, Fourth Judicial Department, but the court has not yet rendered a verdict.

In the company’s annual report, Cybex states that it “may be required to post a bond in a significant amount, up to the full amount of the judgment, in order to obtain a stay of enforcement of the judgment during the pendency of our appeals, and there is no assurance that we will have the financial ability to obtain such a bond. We do not have the resources to satisfy our obligations if the plaintiff is ultimately able, either due to our inability to post a bond or the failure of our appeals, to enforce a judgment in this matter unless the judgment is substantially reduced from the jury verdict. Even if we have the financial ability to obtain a bond or to pay a reduced judgment, such events could have a material adverse effect on our business prospects, liquidity, financial condition and cash flows. The uncertainties of this matter may also negatively affect the willingness of others, including our customers, vendors and lenders, to do business with us.”

Cybex also was involved in a second court case, United Leasing Inc. v. Cybex International, a suit brought by United Leasing, which provided a series of lease financings for the sale of Cybex equipment to a purchaser/lessee that has since entered bankruptcy. Many of the sales were made by an independent dealer that also is a defendant in the suit. United Leasing says it was induced to finance in excess of the purchase price for some of the equipment based primarily on alleged rebates to the purchaser/lessee made by the independent dealer. In January, Cybex agreed to a settlement, paying United Leasing $937,500.

Also in January, Cybex received notification from the NASDAQ Stock Market, on which it is traded, that it may be delisted because its common stock traded below $1.00 per share for 30 consecutive business days. To regain compliance, the closing bid price of Cybex’s common stock must meet or exceed $1.00 per share for at least 10 consecutive business days prior to July 20, 2011. The company’s stock price has not been above $1.00 since early December 2010. It closed at $0.85 on Thursday. That’s higher than the $0.72 to $0.76 it has closed at for much of 2011.

Cybex Chairman and CEO John Aglialoro said in a release from the company: “Cybex sales, which stabilized in mid-2010, showed strong growth in Q4. This trend continued in the first quarter, with Q1 2011 sales exceeding Q1 2010 sales by over 10 percent. Our focus on improving gross margins continued the trend throughout 2010 of improved margin results compared to 2009. I have never been more excited by our new product pipeline; and several new products and product lines at the IHRSA trade show in March were favorably received. We have also entered research partnerships with several prestigious institutions which will reinforce the Cybex exercise science legacy and generate the research results that will help Cybex to continue to develop innovative products that provide better results. We will continue to vigorously defend ourselves with respect to the product liability verdict, which we believe was in error. This process may result in a long and uncertain path, but we have faith that our judicial system can produce a reasonable resolution. In the meantime we are determined to concentrate on our business and hope to build on the momentum established in 2010.”

The company will discuss the results in a conference call with analysts and shareholders at 4:30 p.m. ET on April 7.