ICON Health & Fitness reported that net sales for the fiscal second quarter ended November 27, 2004 decreased 10.9% to $275.4 million from $309.0 million in the year-ago period. Sales of cardiovascular and other equipment in decreased 8.1% to $230.3 million. Sales of strength training equipment decreased 22.7% to $45.1 million.
Gross profit was $65.1 million, or 23.6% of net sales, compared to $93.0 million, or 30.1% of net sales, in the three months ended November 29, 2003. This decrease in gross profit margin was primarily due to increased transportation costs and commodities, i.e., steel, plastics and wood, and the inability to pass on to the consumer the full cost of these increases. Unfavorable manufacturing variances also negatively impacted our gross profit margin. In addition, our direct to consumer business which realizes higher margins was a smaller portion of our overall sales mix in the three months ended November 27, 2004 than in the three months ended November 29, 2003.
Selling expenses increased $0.7 million, or 2.3%, to $31.4 million in the three months ended November 27, 2004. This increase reflected higher bad debt and freight expenses offset by decreased advertising costs. Expressed as a percentage of net sales, selling expenses were 11.4% in the three months ended November 27, 2004 compared to 9.9% in the three months ended November 29, 2003.
Research and development expenses in the three months ended November 27, 2004 were $3.1 million, compared to $3.0 million in the three months ended November 29, 2003. Expressed as a percentage of net sales, research and development expenses were 1.1% in three months ended November 27, 2004 and 1.0% in the three months ended November 29, 2003.
General and administrative expenses decreased $0.3 million, or 1.3%, to $23.6 million in the three months ended November 27, 2004. This decrease for the period can be attributed to decreased legal fees offset by increases in salary and wages related to the amended employment contracts for Scott Watterson and Gary Stevenson during their leave of absence. Expressed as a percentage of net sales, general and administrative expenses were 8.6% in the three months ended November 27, 2004 and 7.7% in the three months ended November 29, 2003.
As a result of the foregoing factors, the income from operations was $7.0 million in the three months ended November 27, 2004 compared to income from operations of $35.3 million in the three months ended November 29, 2003.
As a result of the foregoing factors, EBITDA (as defined under “Seasonality”) was $12.6 million in the three months ended November 27, 2004 compared to EBITDA of $40.9 million in the three months ended November 29, 2003.
Interest expense, including amortization of deferred financing fees, increased $0.6 million, or 9.0%, to $7.3 million in the three months ended November 27, 2004. Expressed as a percentage of net sales, interest expense, including amortization of deferred financing fees, was 2.7% in the three months ended November 27, 2004 and 2.1% in the three months ended November 29, 2003.
The benefit from income taxes was $0.2 million in the three months ended November 27, 2004, compared to a provision for income taxes of $10.6 million in the three months ended November 29, 2003. This change in income taxes for the period can be attributed in part to the loss on discontinued operations and the operating results for the period.
During the three months ended November 27, 2004, ICON determined that the JumpKing, Inc. (“JumpKing”) subsidiary would discontinue the manufacture, marketing and distribution of all outdoor recreational equipment (“outdoor recreational equipment operations”) which includes trampolines, spas and related products. The outdoor recreational equipment operations have been classified as a discontinued operation and its expenses are not included in the results of continuing operations.
The results of operations for the three months ended November 27, 2004 for the outdoor recreational equipment operations have been reclassified to loss from discontinued operations. During the three months ended November 27, 2004, ICON wrote down approximately $33.4 million of assets which consisted of inventory of approximately $31.8 million and fixed assets of approximately $1.6 million. The loss from operations, net of tax, for the outdoor recreational equipment was $17.9 million and $2.6 million for the three months ended November 27, 2004 and November 29, 2003, respectively. The Company expects to complete this discontinuation of its outdoor recreational operations within twelve months. Neither the trampoline operations nor the outdoor recreational equipment operations were part of the Companys core business operations or its strategic focus. The outdoor recreational operations were not making a positive contribution to our earnings and also required a substantial investment in working capital.
In conjunction with the discontinuance of outdoor recreational equipment operations, ICON performed an evaluation of long-lived assets pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment of Long-Lived Assets” (“SFAS 144”) and determined that certain of the manufacturing fixed assets will be subject to an impairment loss of approximately $306,000. Certain other manufacturing fixed assets met the “held for sale” and “discontinued operations” criteria as required by SFAS 144, at November 27, 2004
As a result of the foregoing factors, net loss was $18.0 million in the three months ended November 27, 2004, compared to net income in the three months ended November 29, 2003 of $15.4 million, a decrease of 216.9% over the same period last year.
