Icon's net sales for the fiscal first quarter ended September 3, 2005 increased 7.1%, to $144.2 million from $134.6 million in 2004. Sales of cardiovascular and other equipment increased 10.6% to $119.2 million. Sales of strength training equipment decreased 6.7%, to $25.0 million. The increase in sales can be attributed to increased customer demand for our products.
Gross profit for Q1 was $39.2 million, or 27.2% of net sales, compared to $33.8 million, or 25.1% of net sales, in the first quarter of 2004. This increase in gross profit margin was primarily due to changes in product mix, distribution channel mix and the timely release of products.
Selling expenses decreased $1.9 million, or 6.5%, to $27.2 million in 2005. This decrease reflected reduced advertising. Expressed as a percentage of net sales, selling expenses were 18.9% in the three months ended September 3, 2005 compared to 21.6% in the three months ended August 28, 2004.
Research and development expenses were $2.9 million, compared to $3.0 million in 2004. Expressed as a percentage of net sales, research and development expenses were 2.0% in Q1 2005 compared to 2.2% in 2004.
General and administrative expenses increased 10.1%, to $24.0 million in 2005. This increase for the period can be attributed to increases in depreciation and amortization and salaries and wages offset by reductions in legal fees. Expressed as a percentage of net sales, general and administrative expenses were 16.6% in 2005 and 16.2% in 2004.
As a result of the foregoing factors, the loss from operations was $14.9 million in the first quarter of 2005 compared to loss from operations of $20.1 million in 2004.
As a result of the foregoing factors, EBITDA (as defined under “Seasonality”) was negative $6.7 million in the three months ended September 3, 2005 compared to EBITDA of negative $14.5 million in the three months ended August 28, 2004.
Interest expense, including amortization of deferred financing fees, increased $0.8 million, or 12.7%, to $7.1 million in 2005. Expressed as a percentage of net sales, interest expense, including amortization of deferred financing fees, was 4.9% in the three months ended September 3, 2005 and 4.7% in the three months ended August 28, 2004.
The provision for income taxes was $1.3 million in the three months ended September 3, 2005, compared to a benefit for income taxes of $8.3 million in the three months ended August 28, 2004. The higher effective tax rate in the first quarter of fiscal 2006 is the result of deferred tax valuation allowances. As of September 3, 2005 Icon has a valuation allowance of approximately $40.0 million recorded against our net deferred tax asset.
The company stated that accounting guidelines suggest that when a company has a cumulative loss over a three-year period that a valuation allowance should be provided. Although Icon had income in two of the last three years, the loss in the third year exceeded the cumulative income in the prior two years. Valuation allowances reduce deferred income tax balances to the appropriate amount of recoveralbe income taxes based on assessments of taxable income within the carryback or carryforward periods for each year.
During the second quarter of fiscal 2005, Icon determined that its JumpKing, Inc. (“JumpKing”) subsidiary would discontinue manufacturing, marketing and distributing all outdoor recreational equipment (“Outdoor Recreational Equipment Operations”) which includes trampolines, spas and other non-exercise related products. The Outdoor Recreational Equipment Operations were not a part of Icon's core business operations or our strategic focus. In addition, it was not making a positive contribution to Icon's earnings and also required a substantial investment in working capital.
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 September 3, 2005 for the Outdoor Recreational Equipment Operations have been classified as a loss from discontinued operations. The loss from operations, net of tax, for the Outdoor Recreational Equipment Operations was $1.5 million and $2.7 million for the three months ended September 3, 2005 and August 28, 2004, respectively. As of September 3, 2005, Icon has approximately $7.5 million of assets that have been written down which consist of inventory of approximately $2.2 million, accounts receivable of approximately $4.2 million and fixed assets of approximately $1.1 million. The company is in the process of finding a buyer for the remaining assets and expects to complete this discontinuation of its Outdoor Recreational Equipment Operations by the second quarter of fiscal 2006.
On January 10, 2005, Icon sold its spa business comprising a portion of our JumpKing subsidiary to Keys Backyard, L.P. (“Keys”). The assets sold included all inventory, equipment, business records and customer contracts associated with the spa business. In addition, the company sold a license for the use of trade names to Keys over a period of three years and subleased a portion of JumpKing's facility for the continued manufacturing by Keys. Keys paid approximately $4.0 million for the spa business. Keys is obligated to pay additional amounts associated with the license of trade names calculated as 1.5% of the gross selling price for the Spa Business products sold by Keys over the three year licensing period.
In conjunction with the discontinuance of outdoor recreational equipment operations, Icon performed an evaluation of long-lived assets at the date of sale 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 $0.4 million in the fiscal year ended May 31, 2005. Certain other manufacturing fixed assets met the “held for sale” and “discontinued operations” criteria as required by SFAS 144, at September 3, 2005
As a result of the foregoing factors, net loss was $24.8 million in the three months ended September 3, 2005, compared to a net loss in the three months ended August 28, 2004 of $20.8 million, an increase of 19.2% over the same period last year.