True Temper Sports, Inc. saw net sales for the fourth quarter increase 27.4% to $27.4 million from the $21.5 million recorded during the fourth quarter of 2004. Net sales for the full year 2005 increased 19.5%, to $117.6 million from $98.4 million in 2004. Adjusted EBITDA for the fourth quarter increased 69.4%, to $8.6 million from $5.1 million in the fourth quarter of 2004. Adjusted EBITDA for the full year 2005 increased 26.1%, to $36.0 million from $28.6 million in 2004. Net income for the full year 2005 increased $19.6 million, to a net loss of $0.5 million from a net loss of $20.1 million in 2004.
In his comments about the companys performance, Scott Hennessy, President and CEO said, “This past year certainly represented a rebound for True Temper, and to some extent the overall golf industry. In contrast to 2004, we saw some clearing of the wholesale and retail inventory channels, and a number of significant new product launches from our OEM partners. These market forces combined with several key sales initiatives at True Temper helped to drive revenue to a new full year record of $117.6 million. Internally, we saw a continued shift in the sales mix of our steel golf shafts sold towards more premium, high performance products. While on the graphite golf side of our business we delivered significant increases in unit volume as a result of our successful branded line of Grafalloy ProLaunch shafts, and the execution of our penetration strategy into the stock OEM distribution channel. This penetration strategy was made possible by the successful establishment of our new graphite shaft manufacturing facility in Guangzhou, China. Adding to these positive factors in golf, we also experienced double digit growth in our performance sports division, as our diversification strategy into the hockey and cycling markets truly begins to gain momentum.”
Mr. Hennessy continued, “As always, in addition to our focus on the top line growth of our Company we are equally committed to the profitability delivered on that revenue base. During 2005 we were able to compliment the favorable product sales and profit mix with a number of new cost reduction and productivity programs in our manufacturing facilities. These initiatives were designed to improve quality and efficiency, and to ensure that True Temper remains the shaft company of choice for the worlds top golf companies and equipment distributors. The success of these programs is evident in the gross profit results for 2005, which exceeded 40% on a full year basis, as we effectively offset considerable inflation pressures in raw material costs and energy sources. Through continued discipline in the SG&A area, we were able to drop a significant portion of this gross profit straight to the bottom line, with full year Adjusted EBITDA back to record levels of $36.0 million and 30.6% to net sales. When combined with effective working capital management, this drove significant free cash flow during 2005, which we used to make voluntary prepayments on our term debt totaling $12.0 million for the full year. We are very pleased to report that our improvement in profitability, combined with this voluntary debt reduction, has enabled us to de-leverage the company approximately two full turns during 2005.”
Outlook
Commenting about the companys outlook for the future, Mr. Hennessy said, “We are encouraged about the outlook for 2006, especially in the back half of the year as many of the exciting new products from True Temper and our OEM partners are scheduled for second half launches this year. We also feel that the significant growth in our graphite golf business during 2005 will carryover and continue in 2006. In addition, the momentum gained in our performance sports division, specifically in the hockey and cycling areas, should continue to build throughout each quarter of 2006. During the first half of 2006 we expect these positive factors to be mitigated somewhat by the launch timing and inventory channel management of some of our key global OEM partners. While we are driving for revenue improvement each quarter, the near record levels achieved in the first and second quarters of 2005 certainly make for challenging targets in 2006.”
Mr. Hennessy continued, “Operationally, we see plenty of runway in 2006. Our productivity targets and plant efficiency programs planned for this year are equal to or greater than those of 2005. In addition to these manufacturing initiatives, we are focusing intently on our global distribution and warehousing efforts during 2006. With continued expansion overseas in both operations and sales activity, we must keep our logistics efforts one step ahead of the market demand. Too that end, we will continue the initiatives begun in 2005 to consolidate facilities and streamline the movement of inventory and supplies around the world. Our overall goals from a profitability standpoint remain unchanged as we head into 2006; offset inflation with productivity enhancements and deliver the highest possible read-through to Adjusted EBITDA on the mix of sales in our various lines of business. Beyond that, we will continue to manage our working capital levels very closely, in order to maximize free cash flow and continue to de-leverage the company.”
Acquisition and Recapitalization
On January 30, 2004, TTS Holdings LLC, a 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 the 2004 net income.
As part of the required purchase accounting, the company recorded the estimated fair value of certain intangible assets. Non-cash amortization of these intangible assets during 2005 and 2004 totaled $13.8 million and $11.0 million, respectively, and resulting in a $8.6 million and $6.8 million after-tax reduction to net income in 2005 and 2004, respectively. 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, 2005. The sum of the results of the predecessor and successor companies is also included where appropriate, and labeled as “combined company.”
