True Temper Sports, Inc. saw fourth quarter net sales decrease 11.8% to $24.2 million from $27.4 million last year. Net sales for the full year decreased 8.2% to $108.0 million from the $117.6 million recorded in 2005. Adjusted EBITDA for the fourth quarter decreased to $3.2 million from $8.6 million in the fourth quarter of 2005. Adjusted EBITDA for the full year decreased to $23.8 million from $36.0 million in 2005. The company recorded a net loss for the 2006 fourth quarter and year-to-date periods of $4.6 million and $10.8 million, respectively. During the comparable fourth quarter and year-to-date periods of 2005 the company recorded a net loss of $0.6 million and $0.5 million, respectively.
In his comments about the companys performance, Scott Hennessy, President and CEO said, “Our full year sales decline of approximately 8% is clearly disappointing, following the record level of revenue set in 2005. The overall golf industry proved to be quite challenging during 2006, and especially difficult during the second half of the year. As a component supplier, we are closely tied to the success of new product launches introduced into the market by the leading golf equipment companies, and we are particularly sensitive to product introductions in the iron, wedge and putter categories that use a high percentage of premium steel golf shafts. These areas of the market were especially hard hit by the lack of new golf club introductions during 2006, as the product lines from several key OEMs were in the later stages of their product lifecycles. Against this backdrop, we did execute on several key initiatives intended to improve sales and diversify our revenue base. Our graphite golf sales for 2006 were within $0.5 million of their highest level in over five years. This is the direct result of our continued strength in the premium branded segment of the graphite market with successful products such as our Grafalloy ProLaunch TM series, as well as our strategic expansion into the stock OEM graphite iron shaft category during the past two years. In addition, the fourth quarter proved to be the best in the history for our growing performance sports business, bringing total year sales to
approximately $9 million, and representing a 31% increase over the 2005 total. Our diversification into the hockey and cycling markets continues to drive the revenue gains in this area of our business.”
Mr. Hennessy continued, “The overall decline in revenue had a corresponding impact on our profitability, both in terms of reduced volume and the impact of certain fixed costs spread over fewer units being produced in our manufacturing facilities. In addition, our gross profit percentage was negatively impacted by both a shift in product mix sold and significant commodity inflation during the year. In terms of product mix, the sales momentum we are seeing in our graphite golf and performance sports categories certainly brings dollars to the bottom line, but as a percentage of net sales they are somewhat less profitable than our premium steel shaft product lines. Compounding this mix influence on our bottom line, we also saw continued commodity inflation during 2006 in nearly all of our key raw material and energy sources. Most prominently, we were subject to an industry wide tightening in the supply of carbon fiber, and a corresponding increase in price per pound for this important raw material which is used in graphite golf shafts, hockey sticks and lightweight bicycle components. We reacted to these pressures by instituting a number of cost control and productivity programs throughout our organization, many of which will provide benefits for years to come, even as these commodities return to more realistic pricing levels.”
Commenting about the companys outlook for the future, Mr. Hennessy said, “Many of us in the golf industry are pleased to see 2006 put behind us, and we remain excited about the potential for the coming year. The number of new product launches planned from key golf equipment manufacturers is higher than it was in 2006, and we believe this, along with the sales of Royal Precision products related to our 2006 acquisition, will provide a level of increased revenue in our premium steel category. There will, however, be some timing issues as we track through 2007 and additional OEMs launch their new clubs into the market. We anticipate the first half of the year sales to be relatively comparable to 2006, as sales for the first half of last year were reasonably strong. However, our current expectations are for a much improved second half, driven by new club launches as well as continued momentum and marketshare gains in our performance sports business, where we are again targeting double digit growth. In addition, the initial demand for our recently introduced Grafalloy EPIC TM shafts has been very favorable, and this revolutionary new technology platform could also contribute substantially to our 2007 sales and beyond.”
Mr. Hennessy continued, “The combined effect of volume declines, unfavorable product mix and commodity inflation resulted in a completely unacceptable read-through to EBITDA during 2006, and we have begun strategic initiatives to address each of these critical profitability drivers during 2007. Considering current market conditions, and based on certain purchase price agreements for 2007, we believe that, with the exception of nickel, our overall material and energy costs for 2007 should be flat to slightly down versus 2006. Nickel is a commodity that has had significant inflation in recent weeks, and in response we are increasing our efforts towards conservation, productivity and recovery programs. At current market levels, however, this key raw material could have a negative impact on our first half gross profit margins. Considering all profit drivers, even with the recent spike in nickel pricing, we remain optimistic that on a full year basis we will be improving on the unacceptable gross profit and EBITDA margins delivered in 2006.”
Commenting on the companys most recent acquisition, that of CN Precision in Suzhou, China, Mr. Hennessy said, “As the golf market expands globally, and our customers continue to use golf club assemblers in Southeast Asia, we recognized that True Temper could no longer operate efficiently with only one steel golf shaft manufacturing location. To address this need we have recently announced the acquisition of a steel golf shaft manufacturing company just outside Shanghai, China. This is a startup operation, and we will spend a considerable amount of the year commissioning the plant and beginning production trial runs. It is a complicated and technical process to manufacture the best steel golf shafts in the world, but we are confident that we will be manufacturing product in our new China facility before the end of 2007, and we look forward to ramping up production at that location over the next two to three years. This expansion of capacity will enable True Temper to better serve the global golf equipment companies by improving our international supply chain, and will help to position us closer to the expanding Asian market for golf equipment.”