True Temper Sports, Inc. announced that net sales for 2004 decreased to $98.4 million from the $116.2 million in 2003. TRUE posteed a loss of $20.1 million for the year versus net income of $10.9 million in the prior year. Excluding the impact of certain one time acquisition related expenses and the effect of a non-cash inventory fair value adjustment, which resulted in an after-tax charge of $18.1 million, described more fully below, the net loss for 2004 would have been $1.9 million compared to net income of $10.9 million in the prior year.
Adjusted EBITDA decreased to $28.6 million in 2004 from $36.1 million in 2003. Cash flow provided by operating activities was $9.7 million in 2004, compared to $21.4 million during 2003.
On January 30, 2004, TTS Holdings LLC, a new company formed by Gilbert Global Equity Partners L.P., entered into a stock purchase agreement with our direct parent company, True Temper Corporation, and certain of its security holders, pursuant to which TTS Holdings LLC and certain members of our senior management agreed to purchase all of the outstanding shares of capital stock of True Temper Corporation. The transaction contemplated by the purchase agreement closed on March 15, 2004. As part of this transaction, the Company was recapitalized through the establishment of a new senior credit facility and the issuance of new 8-3/8% senior subordinated notes due 2011. In conjunction with this recapitalization, certain expenses related to the early extinguishment of long-term debt and other related transaction fees were recorded totaling $14.6 million, resulting in a $10.9 million after-tax reduction to net income. In addition, as part of the required purchase accounting, the Company made a one time fair value adjustment to its inventory of approximately $11.7 million, which was subsequently amortized through cost of sales in 2004, resulting in a $7.2 million after-tax reduction to net income.
The transaction was accounted for using the purchase method of accounting. Accordingly, the financial statements included in this press release present the historical cost basis results of the Company as “predecessor company” through March 14, 2004, and the results of the Company as “successor company” from March 15, 2004 through December 31, 2004. The sum of the results of the predecessor and successor companies is also included, and labeled as “combined company.”
In his comments about the Company's performance, Scott Hennessy, President and CEO said, “On a full year basis our sales decreased approximately 15% from 2003. This is roughly the same year-to-date decline that we experienced through September 2004, and the fourth quarter saw a continuation of the sluggish market conditions which began in the early summer months. During the fourth quarter of 2004 we continued to see the same unfavorable market conditions we have previously described, including excess inventory in the distribution channel, delays in new product launches from our OEM partners, and adverse weather conditions throughout the United States affecting the amount of golf being played. In addition to these adverse conditions, it also became apparent during the fourth quarter that many in the golf industry began looking past the current year and into 2005, placing continued pressure on the revenue line.”
Mr. Hennessy continued, “This extended decline in revenue has challenged us to be very aggressive in managing expenses at every level in our organization. During 2004 we took the necessary steps to mitigate the impact of the sales decline on our profitability and cash flow. We right-sized our manufacturing facilities to maintain gross profit percentages near historic levels, and we made strategic, short-term cuts to non-critical SG&A expenses. Our efforts enabled us to deliver Adjusted EBITDA at 29% of sales for the full year, very near our benchmark 30% level, and positive cash flow from operating activities of nearly $10.0 million. In addition to our cost control efforts, we also completed the transition of substantially all of our graphite golf shaft production into our new facility in Guangzhou, China. The transition went smoothly from an operations and customer support perspective, and with this new, lower cost manufacturing alternative we are well positioned to grow our graphite golf and performance sports businesses in 2005.”
In his comments about the Company's future performance, Mr. Hennessy said, “After a very difficult year in 2004, for the overall golf industry and for True Temper specifically, we are encouraged with some of the revenue drivers in place for 2005. We have entered 2005 with an incoming order trend that exceeds that of 2004, and we believe there are several key market drivers that should contribute to some level of growth in the new year. First, we believe that inventory levels, throughout the wholesale and retail channels, are in a better position entering 2005 than they were for the last half of 2004. Second, we anticipate a higher number of new product launches from our key OEM partners during the coming year, as compared to the level in 2004, especially in the iron category. In addition to these overall industry drivers, we also feel that our branded new product offerings, entrance into the mid-range graphite market, and the momentum building in both our hockey and bike businesses will all contribute to internally generated growth in 2005. While the landscape for the full year remains somewhat unclear, as visibility into future periods continues to be limited and our key OEM and distribution partners place orders in a demand mode, we have started to see the early results of these more positive revenue drivers. We expect our first quarter 2005 sales to exceed the first quarter of 2004, and for the overall annual revenue in 2005 to exceed the $98.4 million recorded last year. However, based on the limited visibility within the industry at this time, we cannot give specific guidance on quarterly results outside of the first quarter of 2005. The retail sell-through, and subsequent reorder patterns, will be the key to the magnitude of the 2005 recovery.”
Mr. Hennessy went on to say, “In addition to the anticipated increase in sales, the cost control efforts we undertook throughout 2004 have positioned the Company very well to take full advantage of the increased revenue. We have put ourselves in position to maximize the EBITDA read-through of the incremental sales, and improve our free cash flow during 2005. We certainly face some inflationary factors in the coming year, for raw materials, energy and healthcare, but we believe our cost containment and productivity programs will help to offset the negative impact of these items.”
TRUE TEMPER SPORTS, INC.
(A wholly-owned subsidiary of True Temper Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Predecessor Successor Combined Predecessor Predecessor
Company Company Company Company Company
Period from Period from Period from Period from Period from
January 1 March 15 January 1 January 1 January 1
To March 14, To Dec. 31, To Dec. 31, To Dec. 31, To Dec. 31,
2004 2004 2004 2003 2002
NET SALES $20,247 $78,120 $98,367 $116,206 $107,401
Cost of sales 11,871 60,104 71,975 69,470 65,161
GROSS PROFIT 8,376 18,016 26,392 46,736 42,240
Selling,
general and
administrative
expenses 3,635 9,520 13,155 14,747 13,578
Amortization of
intangible
assets - 10,984 10,984 - -
Business
development,
start-up costs
and transition
costs 100 738 838 869 312
Transaction and
reorganization
expense 5,381 25 5,406 - -
Loss on early
extinguishment
of long-term
debt 9,217 - 9,217 - 777
OPERATING INCOME
(LOSS) (9,957) (3,251) (13,208) 31,120 27,573
Interest expense,
net of interest
income 2,498 13,491 15,989 13,017 12,236
Other expenses,
net (2) 72 70 132 93
INCOME (LOSS)
BEFORE INCOME
TAXES (12,453) (16,814) (29,267) 17,971 15,244
Income tax
(benefit)
expense (2,845) (6,350) (9,195) 7,113 5,992
NET INCOME
(LOSS) $(9,608) $(10,464) $(20,072) $10,858 $9,252
