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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-72343
-------------------------
TRUE TEMPER SPORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3949 52-2112620
(STATE OF OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
8275 TOURNAMENT DRIVE
SUITE 200
MEMPHIS, TENNESSEE 38125
TELEPHONE: (901) 746-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
As of August 14, 2002 the Registrant had 100 shares of Common Stock,
$0.01 par value per share, outstanding.
TRUE TEMPER SPORTS, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations for the three and six month periods
ended June 30, 2002 (Unaudited) and July 1, 2001 (Unaudited)........ 1
Condensed Balance Sheets as of June 30, 2002 (Unaudited) and
December 31, 2001 (Unaudited)....................................... 2
Condensed Statements of Cash Flows for the six month periods
ended June 30, 2002 (Unaudited) and July 1, 2001 (Unaudited)........ 3
Notes to Condensed Financial Statements (Unaudited)................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 14
Item 2. Changes in Securities and Use of Proceeds........................... 14
Item 3. Defaults Upon Senior Securities..................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................. 14
Item 5. Other Information................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................... 15
Signatures............................................................................ 17
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
--------------------- -----------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
------- ------- ------- -------
Net sales .................................... $29,892 $34,552 $59,254 $68,944
Cost of sales ................................ 16,907 20,310 35,671 41,704
------- ------- ------- -------
GROSS PROFIT ............................... 12,985 14,242 23,583 27,240
Selling, general and administrative expenses . 3,799 4,469 7,375 9,386
Amortization of goodwill ..................... -- 675 -- 1,350
Loss on early extinguishment of long-term debt -- -- 20 --
------- ------- ------- -------
OPERATING INCOME ........................... 9,186 9,098 16,188 16,504
Interest expense, net of interest income ..... 3,067 3,141 6,169 6,360
Other expenses, net .......................... 4 1 8 12
------- ------- ------- -------
INCOME BEFORE INCOME TAXES ................. 6,115 5,956 10,011 10,132
Income taxes ................................. 2,374 2,536 3,894 4,390
------- ------- ------- -------
NET INCOME ................................. $ 3,741 $ 3,420 $ 6,117 $ 5,742
======= ======= ======= =======
See accompanying notes to condensed financial statements
1
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................. $ 14,389 $ 8,177
Receivables, net ........................................................... 15,205 13,459
Inventories ................................................................ 12,669 13,441
Prepaid expenses and other current assets .................................. 1,735 1,749
-------- --------
Total current assets ................................................... 43,998 36,826
Property, plant and equipment, net ........................................... 15,630 16,729
Goodwill, net ................................................................ 71,506 71,506
Deferred tax assets, net ..................................................... 56,558 60,356
Other assets ................................................................. 3,616 3,913
-------- --------
Total assets ........................................................... $191,308 $189,330
======== ========
LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt .......................................... $ 1,275 $ 4,675
Accounts payable ........................................................... 5,038 4,390
Accrued expenses and other current liabilities ............................. 5,575 4,836
-------- --------
Total current liabilities .............................................. 11,888 13,901
Long-term debt less the current portion ...................................... 111,422 111,829
Other liabilities ............................................................ 2,357 2,297
-------- --------
Total liabilities ...................................................... 125,667 128,027
STOCKHOLDER'S EQUITY
Common stock--par value $0.01 per share; authorized 1,000 shares; issued and
outstanding 100 shares ................................................... -- --
Additional paid in capital ................................................. 40,326 40,326
Retained earnings .......................................................... 25,315 20,977
-------- --------
Total stockholder's equity ............................................. 65,641 61,303
-------- --------
Total liabilities and stockholder's equity ............................. $191,308 $189,330
======== ========
See accompanying notes to condensed financial statements
2
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE SIX
MONTHS ENDED
-------------------------
JUNE 30, JULY 1,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income ...................................................................... $ 6,117 $ 5,742
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 1,657 2,996
Amortization of deferred financing costs ...................................... 349 324
Loss on disposal of property, plant and equipment ............................. 9 14
Loss on early extinguishment of long-term debt ................................ 20 --
Deferred taxes ................................................................ 3,798 4,320
Changes in operating assets and liabilities, net .............................. 498 (3,457)
-------- --------
Net cash provided by operating activities ................................... 12,448 9,939
INVESTING ACTIVITIES
Purchase of property, plant and equipment ....................................... (567) (1,288)
Proceeds from sales of property, plant and equipment ............................ -- 12
-------- --------
Net cash used in investing activities ....................................... (567) (1,276)
FINANCING ACTIVITIES
Principal payments on bank debt ................................................. (3,537) (888)
Repurchase of Senior Subordinated Notes ......................................... (282) --
Principal payments on capital leases ............................................ (12) (15)
Dividends paid .................................................................. (1,779) (1,780)
Other financing activity ........................................................ (59) (62)
-------- --------
Net cash used in financing activities ....................................... (5,669) (2,745)
Net increase in cash .............................................................. 6,212 5,918
Cash at beginning of period ....................................................... 8,177 4,168
-------- --------
Cash at end of period ............................................................. $ 14,389 $ 10,086
======== ========
See accompanying notes to condensed financial statements
3
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1) BASIS OF PRESENTATION
The accompanying unaudited financial statements of True Temper Sports,
Inc. ("True Temper" or the "Company") have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission ("SEC") for
quarterly reports on Form 10-Q and consequently do not include all the
disclosures required by accounting principles generally accepted in the United
States of America. It is suggested that these financial statements be read in
conjunction with the audited financial statements and the notes thereto for the
year ended December 31, 2001. In the opinion of management, the financial
statements include all adjustments which are necessary for the fair presentation
of results for interim periods.
The Company's fiscal year begins on January 1 and ends on December 31 of
each year. During the course of the year the Company closes its books on a
monthly and quarterly basis following a 4,4,5 week closing calendar. Since the
Company uses Sunday as the last day of each period (with the exception of
December) the number of days in the first and fourth quarters of any given year
can vary depending on which day of the week January 1st falls on.
2) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standard Board ("FASB") issued
Statement No. 142, Goodwill and Other Intangible Assets, which requires goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of the Statement. Statement 142 also requires intangible assets with
estimable useful lives be amortized over the respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with FAS Statement No. 131, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.
The Company adopted Statement 142 as of January 1, 2002, and has since
completed the process of evaluating its goodwill balances to determine if any
impairment exists. To accomplish this, the Company identified its reporting
units and determined the carrying value of each reporting unit by assigning the
Company's assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The Company then
calculated the estimated fair value of each reporting unit and compared it to
the carrying amount of each reporting unit.
The Company's valuation process indicated no impairment of goodwill for
its reporting units. The Company will continue to test reporting unit goodwill
for potential impairment annually, in the fourth quarter of each year, or sooner
if a goodwill impairment indicator is identified.
As of the date of adoption, the Company had unamortized goodwill in the
amount of $71.5 million, all of which was subject to the transition provisions
of Statements 142. Amortization expense related to goodwill was approximately
$1.4 million for the six month period ended July 1, 2001.
4
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
The following table indicates what the net income amount would have been
in the prior year had amortization of goodwill not been recorded.
For the Three Months Ended
----------------------------------------------------
June 30,
2002 July 1, 2001
-------- ----------------------------------------
Add Back
Goodwill
As Reported Amortization As Adjusted
----------- ----------- -----------
Income before income taxes .................. $6,115 $5,956 $ 675 $6,631
Income taxes .............................. 2,374 2,536 23 2,559
------ ------ ------ ------
Net Income .................................. $3,741 $3,420 $ 652 $4,072
====== ====== ====== ======
For the Three Months Ended
----------------------------------------------------
June 30,
2002 July 1, 2001
-------- ----------------------------------------
Add Back
Goodwill
As Reported Amortization As Adjusted
----------- ----------- -----------
Income before income taxes ................ $10,011 $10,132 $ 1,350 $11,482
Income taxes ............................ 3,894 4,390 45 4,435
------ ------ ------ ------
Net Income ................................ $ 6,117 $ 5,742 $ 1,305 $ 7,047
====== ====== ====== ======
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements Nos. 4 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which will affect income statement classification of gains and
losses from extinguishment of debt. Statement 145 considers extinguishment of
debt a risk management strategy by the reporting entity and the FASB does not
believe it should be considered extraordinary under the criteria in APB Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB 30), unless the debt extinguishment meets
the unusual in nature and infrequency of occurrence criteria in APB 30.
Statement 145 is effective for fiscal years beginning after May 15, 2002
with early adoption encouraged. The Company elected to adopt Statement 145 as of
January 1, 2002, and as such its loss on the early extinguishment of debt in
2002 was recorded as a component of operating income. The Company did not
extinguish debt in the first six months of 2001.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires all
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities
after December 31, 2002. The impact of adopting SFAS No. 146 is not expected to
be material.
5
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
3) INVENTORIES
JUNE 30, DECEMBER 31,
2002 2001
------- -------
Raw materials . $ 1,399 $ 1,558
Work in process 2,165 2,124
Finished goods 9,105 9,759
------- -------
Total ......... $12,669 $13,441
======= =======
4) RELATED PARTY TRANSACTIONS
In 1998, True Temper entered into a management services agreement with
Cornerstone Equity Investors, LLC ("Cornerstone"). Cornerstone is a related
party through its indirect management and ownership interest in True Temper
Corporation.
In accordance with this agreement, Cornerstone has agreed to provide:
(1) general management services;
(2) assistance with the identification, negotiation and analysis of
acquisitions and dispositions;
(3) assistance with the negotiation and analysis of financing
alternatives; and
(4) other services agreed upon by True Temper Corporation.
In exchange for such services, Cornerstone or its nominee receives:
(1) an annual advisory fee of $0.5 million payable quarterly, plus
reasonable out-of-pocket expenses;
(2) a transaction fee in an amount equal to 1.0% of the aggregate
transaction value in connection with the consummation of any
material acquisition, divestiture, financing or refinancing by
True Temper or any of its subsidiaries.
The management services agreement has an initial term of five years,
subject to automatic one-year extensions unless True Temper or Cornerstone
provide written notice of termination. The annual advisory fee of $0.5 million
is an obligation of the Company and is subordinated to the 10 7/8% Senior
Subordinated Notes due 2008 and the senior credit facility.
5) SEGMENT REPORTING
The Company operates in two reportable business segments: golf shafts and
performance tubing. The Company's reportable segments are based on the type of
product manufactured and the application of that product in the marketplace. The
golf shaft segment manufactures and sells steel, composite, and multi-material
golf club shafts for use exclusively in the golf industry. The performance
tubing segment manufactures and sells high strength, tight tolerance tubular
components for bicycle, automotive and recreational sport markets. The Company
evaluates the performance of these segments based on segment sales and gross
profit. The Company has no inter-segment sales.
6
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
---------------------- ----------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
------- ------- ------- -------
Net sales:
Golf shafts ...... $28,693 $33,355 $57,007 $66,825
Performance tubing 1,199 1,197 2,247 2,119
------- ------- ------- -------
Total .......... $29,892 $34,552 $59,254 $68,944
======= ======= ======= =======
Gross profit:
Golf shafts ...... $12,654 $13,892 $22,956 $26,573
Performance tubing 331 350 627 667
------- ------- ------- -------
Total .......... $12,985 $14,242 $23,583 $27,240
======= ======= ======= =======
Following is a reconciliation of total reportable segment gross profit to
total Company income before income taxes:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
---------------------- ----------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
------- ------- ------- -------
Total reportable segment gross profit .... $12,985 $14,242 $23,583 $27,240
Less:
Selling, general & administrative expenses 3,799 4,469 7,375 9,386
Amortization of goodwill ............... -- 675 -- 1,350
Loss on early extinguishment of
long-term debt ....................... -- -- 20 --
Interest expense, net of interest income 3,067 3,141 6,169 6,360
Other expenses, net .................... 4 1 8 12
------- ------- ------- -------
Total Company income before income taxes . $ 6,115 $ 5,956 $10,011 $10,132
======= ======= ======= =======
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the more
detailed information in our 2001 Annual Financial Statements, including the
notes thereto, appearing most recently in our 2001 Annual Report on Form 10-K,
filed with the SEC on April 1, 2002.
COMPANY OVERVIEW
True Temper Sports, Inc. ("True Temper" or the "Company"), a wholly
owned subsidiary of True Temper Corporation, is a leading designer, manufacturer
and marketer of steel, composite, and multi-material golf club shafts for
original equipment manufacturers and distributors in the golf equipment
industry. In addition, True Temper produces and sells a variety of performance
tubing products that offer high strength and tight tolerance tubular components
to the bicycle, automotive and recreational sports markets. In calendar 2001,
golf shaft sales represented 96% of total revenues, and performance tubing sales
represented 4%. This sales split has remained relatively consistent during the
first half of 2002.
RESULTS OF OPERATIONS
The following table sets forth the components of net income as a
percentage of net sales for the periods indicated:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
------------ ------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
---- ---- ---- ----
Net sales ..................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ................. 56.6 58.8 60.2 60.5
Gross profit .................. 43.4 41.2 39.8 39.5
SG&A expenses ................. 12.7 12.9 12.4 13.6
Amortization of goodwill ...... 0.0 2.0 0.0 2.0
Loss on early extinguishment of
long-term debt ........... 0.0 0.0 0.0 0.0
Operating income ........... 30.7 26.3 27.3 23.9
Interest expenses ............. 10.3 9.1 10.4 9.2
Other expenses, net ........... 0.0 0.0 0.0 0.0
Income before income taxes . 20.5 17.2 16.9 14.7
Income taxes .................. 7.9 7.3 6.6 6.4
Net income ................. 12.5% 9.9% 10.3% 8.3%
Other Information:
EBITDA ........................ 33.4% 30.7% 30.1% 28.3%
Adjusted EBITDA ............... 33.8% 31.1% 30.6% 28.6%
(See definitions of EBITDA and Adjusted EBITDA contained herein.)
SECOND QUARTER ENDED JUNE 30, 2002 COMPARED TO THE SECOND QUARTER ENDED
JULY 1, 2001
NET SALES for the second quarter of 2002 decreased $4.7 million, or
13.5%, to $29.9 million from $34.6 million in the second quarter of 2001. Golf
shaft sales decreased $4.7 million, or 14.0%, to $28.7 million in the second
quarter of 2002 from $33.4 million in the second quarter of 2001. This decrease
was driven primarily by reduced sales of our multi-material golf shaft product
line, which was introduced during the first quarter of 2001. The sales generated
during the first and second quarters of 2001 for this product line were
magnified by the initial sales to OEM's and distributors to fill the supply
chain, as well as the industry-wide interest generated by the nature of this new
product offering. The decline in sales of multi-material golf shafts and other
shafts was
8
partially offset by the increase in sales of premium grade steel shafts which
have strengthened with the introduction of new lighter weight steel products and
the incremental volume from new customers entering the golf club market. Sales
of our premium grade steel golf shafts increased over 30% between comparable
quarters.
Performance tubing sales in the second quarter of 2002 were flat as
compared to the second quarter of 2001.
Net sales to international customers increased $1.5 million, or 25.6%,
to $7.3 million in the second quarter of 2002 from $5.8 million in the second
quarter of 2001. Most of this growth was generated from increased sales volume
to Asia and Japan for new premium grade lightweight steel golf shafts. In
addition we recognized modest improvements from favorable changes to foreign
currency exchange rates in the second quarter of 2002.
GROSS PROFIT for the second quarter of 2002 decreased approximately
$1.3 million, or 8.8%, to $13.0 million from $14.2 million in the second quarter
of 2001. Gross profit as a percentage of net sales increased to 43.4% in the
second quarter of 2002 from 41.2% in the second quarter of 2001. This increase
in gross profit as a percentage of net sales was driven by several factors,
including a favorable shift in the mix of sales to higher margin products, the
positive impact from changes in foreign currency exchange rates between the US
dollar and other currencies and decreases in the cost of natural gas. These
favorable factors were somewhat offset by increased costs for medical insurance
and other inflation factors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") for the second
quarter of 2002 decreased $0.7 million, or 15.0%, to $3.8 million from $4.5
million in the second quarter of 2001. SG&A as a percentage of net sales
decreased to 12.7% in the second quarter of 2002 from 12.9% in the second
quarter of 2001. During 2001 we made a strategic decision to increase our
promotional advertising and spend a large portion of our annual advertising
budget in the first half of the year in order to heavily promote the new BiMatrx
shaft which was launched in January 2001. During 2002 our promotional spending
has been reduced in total and the spending is more evenly distributed throughout
the year.
OPERATING INCOME for the second quarter of 2002 increased by $0.1
million, or 1.0%, to $9.2 million from $9.1 million in the second quarter of
2001. Operating income as a percentage of net sales increased to 30.7% in the
second quarter of 2002 from 26.3% in the second quarter of 2001. Effective
January 1, 2002, we adopted FASB No. 142, Goodwill and Other Intangible Assets,
which requires us, among other things, to discontinue the amortization of our
goodwill. In the second quarter of 2001 goodwill amortization was $0.7 million.
Excluding the effect of goodwill amortization in the second quarter 2001,
operating income for the second quarter of 2002 would have decreased by $0.6
million, or 6.0% from the second quarter of 2001 and operating income as a
percentage of net sales would have increased to 30.7% from 28.3%. The remainder
of the change in operating income reflects the changes described above in sales,
gross profit and SG&A expenses.
INTEREST EXPENSE for the second quarter of 2002 remained relatively
flat compared to the second quarter of 2001 at $3.1 million.
INCOME TAXES for the second quarter of 2002 decreased to $2.4 million
from $2.5 million in the second quarter of 2001. The effective tax rate during
these periods differs from a federal statutory rate of 34% due primarily to the
incremental tax rate for state and foreign income tax purposes and in the second
quarter of 2001 the pre-tax income added back for the non-deductible portion of
goodwill amortization.
NET INCOME for the second quarter of 2002 increased by $0.3 million to
$3.7 million from $3.4 million in the second quarter of 2001. This increase is
reflective of the profit impact from the items described above.
9
EBITDA AND ADJUSTED EBITDA are measurements used by some to gauge our
operating performance. EBITDA represents operating income plus depreciation and
amortization of goodwill, if applicable. Adjusted EBITDA represents EBITDA plus
management service fees.
EBITDA and Adjusted EBITDA should not be considered as an alternative
to net income or any other GAAP measurement of performance, as a sole indicator
of operating performance, or an alternative to cash flow from operating,
investing and financing activities as a measure of liquidity.
EBITDA and Adjusted EBITDA for the second quarter of 2002 and 2001 are
calculated as follows:
FOR THE THREE MONTH
PERIOD ENDED
------------
JUNE 30, JULY 1,
2002 2001
---- ----
Operating income .......... $ 9,186 $ 9,098
Plus:
Depreciation ........... 801 843
Amortization of goodwill -- 675
------- -------
EBITDA .................... 9,987 10,616
Plus:
Management service fees 125 125
------- -------
ADJUSTED EBITDA ........... $10,112 $10,741
======= =======
The decrease in Adjusted EBITDA of $0.6 million, or 5.8%, is reflective
of the profit impact of the operating income items described above, as well as
the impact of the items identified in the table above.
SIX MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTH PERIOD ENDED
JULY 1, 2001
NET SALES for the first six months of 2002 decreased approximately $9.7
million, or 14.1%, to $59.3 million from $68.9 million in the first six months
of 2001. Golf shaft sales decreased $9.8 million, or 14.7%, to $57.0 million in
the first six months of 2002 from $66.8 million in the first six months of 2001.
This decrease was driven primarily by reduced sales of our multi-material golf
shaft product line, which was introduced during the first quarter of 2001. The
sales generated during the first six months of 2001 were magnified by the
initial sales to OEM's and distributors to fill the supply chain, as well as the
industry-wide interest generated by the nature of this new product offering. The
decline in sales of multi-material golf shafts and other shafts was partially
offset by the increase in sales of premium grade steel shafts which have
strengthened with the introduction of new lighter weight steel products and the
incremental volume from new customers entering the golf club market.
Performance tubing sales increased $0.1 million, or 6.0%, to $2.2
million in the first six months of 2002 from $2.1 million in the first six
months of 2001.
Net sales to international customers increased $1.0 million, or 8.1%,
to $13.7 million in the first six months of 2002 from $12.7 million in the first
six months of 2001. Most of this growth was generated from increased sales
volume to Japan for new premium grade lightweight steel golf shafts. However,
despite foreign currency exchange rates improving during the second quarter, the
negative impact from a weaker Japanese Yen in the first quarter of this year
generated a modest negative impact on our yen sales to somewhat offset the
increase in volume.
GROSS PROFIT for the first six months of 2002 decreased approximately
$3.7 million, or 13.4%, to $23.6 million from $27.2 million in the first six
months of 2001. Gross profit as a percentage of net sales increased to 39.8% in
the first six months of 2002 from 39.5% in the first six months of 2001. This
increase in gross profit as a percentage of net sales was driven by several
factors, including a favorable shift in the mix of sales to higher
10
margin products, and decreases in the cost of natural gas. These favorable
factors were somewhat offset by increased costs for medical insurance, the
cumulative year to date negative impact from changes in the foreign currency
exchange rate between the US Dollar and Japanese Yen, and other inflation
factors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") for the first six
months of 2002 decreased $2.0 million, or 21.4%, to $7.4 million from $9.4
million in the first six months of 2001. SG&A as a percentage of net sales
decreased to 12.4% in the first six months 2002 from 13.6% in the first six
months of 2001. During 2001 we made a strategic decision to increase our
promotional advertising and spend a large portion of our annual advertising
budget in the first half of the year in order to heavily promote the new BiMatrx
shaft which was launched in January 2001. During 2002 our promotional spending
has been reduced in total and the spending is more evenly distributed throughout
the year.
OPERATING INCOME for the first six months of 2002 decreased by $0.3
million, or 1.9%, to $16.2 million from $16.5 million in the first six months of
2001. Operating income as a percentage of net sales increased to 27.3% in the
first six months of 2002 from 23.9% in the first six months of 2001. Effective
January 1, 2002, we adopted FASB No. 142, Goodwill and Other Intangible Assets,
which requires us, among other things, to discontinue the amortization of our
goodwill. In the first six months of 2001 goodwill amortization was $1.4 million
.. Excluding the effect of goodwill amortization in the first six months 2001,
operating income for the first six months of 2002 would have decreased by $1.7
million, or 9.3% from the first six months of 2001 and operating income as a
percentage of net sales would have increased to 27.3% from 25.9%. The remainder
of the change in operating income reflects the changes described above in sales,
gross profit and SG&A expenses.
INTEREST EXPENSE for the first six months of 2002 decreased to $6.2
million from $6.4 million in the first six months of 2001.
INCOME TAXES for the first six months of 2002 decreased to $3.9 million
from $4.4 million in the first six months of 2001. The effective tax rate during
these periods differs from a federal statutory rate of 34% due primarily to the
incremental tax rate for state and foreign income tax purposes and in the first
six months of 2001 the pre-tax income added back for the non-deductible portion
of goodwill amortization.
NET INCOME for the first six months of 2002 increased by $0.4 million
to $6.1 million from $5.7 million in the first six months of 2001. This increase
is reflective of the profit impact from the items described above.
EBITDA AND ADJUSTED EBITDA are measurements used by some to gauge our
operating performance. EBITDA represents operating income plus depreciation and
amortization of goodwill, if applicable. Adjusted EBITDA represents EBITDA plus
management service fees and the loss on early extinguishment of long-term debt.
EBITDA and Adjusted EBITDA should not be considered as an alternative
to net income or any other GAAP measurement of performance, as a sole indicator
of operating performance, or an alternative to cash flow from operating,
investing and financing activities as a measure of liquidity.
EBITDA and Adjusted EBITDA for the first six months of
2002 and 2001 are calculated as follows:
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FOR THE SIX MONTH
PERIOD ENDED
------------
JUNE 30, JULY 1,
2002 2001
---- ----
Operating income ................................ $16,188 $16,504
Plus:
Depreciation ................................. 1,657 1,646
Amortization of goodwill ..................... -- 1,350
------- -------
EBITDA .......................................... 17,845 19,500
Plus:
Management service fees ...................... 250 250
Loss on early extinguishment of long-term debt 20 --
------- -------
ADJUSTED EBITDA ................................. $18,115 $19,750
======= =======
The decrease in Adjusted EBITDA of $1.6 million, or 8.3%, is reflective
of the profit impact of the operating income items described above, as well as
the impact of the items identified in the table above.
The following table shows cash flow activity by source. Discussion of
cash flow activity is noted in the Liquidity and Capital Resources section
below.
FOR THE SIX MONTH
PERIOD ENDED
------------
JUNE 30, JULY 1,
2002 2001
---- ----
Net cash provided by operating activities $ 12,448 $ 9,939
Net cash used in investing activities ... (567) (1,276)
Net cash used in financing activities ... $ (5,669) $ (2,745)
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
We have a senior credit facility which includes a $20.0 million
non-amortizing revolving credit facility, a $10.0 million term A loan due 2004,
and a $27.5 million term B loan due 2005. Amounts under the revolving credit
facility are available on a revolving basis commencing September 30, 1998, and
ending September 30, 2004. As of June 30, 2002 the outstanding principal balance
for the term A loan is $1.0 million and the outstanding principal balance for
the term B loan is $12.0 million.
In addition, we have issued $100.0 million in 10 7/8% Senior
Subordinated Notes Due 2008 (the "Notes"). The Notes require cash interest
payments each June 1 and December 1, beginning June 1, 1999. The Notes are
redeemable by the Company, under certain circumstances and at certain redemption
prices, beginning December 1, 2003. In 2001 the Company initiated a program to
buy back some of the outstanding Notes in an open market non-redemptive
repurchase program. As of June 30, 2002 the outstanding principal amount of
Notes owed to third party investors was $99.7 million.
Both the senior credit facility and the Notes contain covenants and
events of default, including substantial restrictions and provisions which,
among other things, limit our ability to incur additional indebtedness, make
acquisitions and capital expenditures, sell assets, create liens or other
encumbrances, make certain payments and dividends, or merge or consolidate. The
senior credit facility also requires us to maintain certain specified financial
ratios and tests including minimum EBITDA levels, minimum interest coverage and
fixed charge coverage ratios, and maximum leverage ratios. At June 30, 2002 we
were in compliance with all of the covenants for both the senior credit facility
and the Notes. Furthermore, the senior credit facility requires certain
mandatory prepayments
12
including payments from the net proceeds of certain asset sales and a portion of
our Excess Cash Flow, which is defined in the senior credit facility.
SIX MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTH PERIOD ENDED
JULY 1, 2001
In the first six months of 2002 cash provided by operating activities
increased by $2.5 million to $12.4 million from $9.9 million in 2001. This
increase was driven by a decrease in cash required for working capital needs,
primarily resulting from a reduction in the relative investment in trade
accounts receivable between comparative periods.
We used $0.6 million of cash to invest in property, plant and equipment
in the first half of 2002, compared to the $1.3 million spent in the first half
of 2001.
We repaid $3.5 million of the principal on our senior credit facility
during the first six months of 2002, compared to the $0.9 million that we repaid
during the first six months of 2001. The $3.5 million in principal payments
included $1.1 million of scheduled principal payments plus a $2.4 million
mandatory principal prepayment based upon the Excess Cash Flow generated in
2001. Also in the first quarter of 2002, we repurchased $0.3 million of our
Notes.
Currently, our intention is to use existing cash and cash provided from
future operations, if any, as allowed within the covenants of our senior credit
facility and our Notes, to:
- Repay our senior credit facility, and/or
- Repurchase Notes from existing Note holders in a
non-redemptive open market repurchase program, and/or
- Issue quarterly cash dividends to our parent company, True
Temper Corporation, for its use to pay cash interest on its
senior discount notes, and/or
- To make additional investments in the business for growth or
profit improvements, which may include, among other things,
capital expenditures and/or business acquisitions.
In addition to the debt service obligations for principal and interest
payments created by the senior credit facility and the Notes described above,
our liquidity needs largely relate to working capital requirements and capital
expenditures for machinery and equipment. We intend to fund our current and long
term working capital, capital expenditure and debt service requirements through
cash flow generated from operations. However, since there can be no assurance of
future performance, as of June 30, 2002 we have the $20.0 million revolving
credit facility available for future cash requirements. The maximum amount we
may use of the $20.0 million revolving credit facility is limited by the
financial covenants contained within the senior credit facility. Information
concerning our senior credit facility is contained in the footnotes to the
financial statements of our 2001 Annual Report on Form 10-K, as filed with the
SEC on April 1, 2002.
Depending on the size, any future acquisitions, joint ventures, capital
expenditures or similar transactions may require significant capital resources
in excess of cash provided by operations, and potentially in excess of cash
available under the revolving credit facility. There can be no assurance that
the Company will be able to obtain the necessary capital under acceptable terms,
from creditors or other sources, that will be sufficient to execute any such
business investment or capital expenditure.
FORWARD-LOOKING STATEMENTS
13
The Private Securities Litigation Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by our Company. This document
contains forward-looking statements, including but not limited to Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". All statements which address operating performance, events or
developments that we expect, plan, believe, hope, wish, forecast, predict,
intend, or anticipate will occur in the future, and other similar meanings or
phrases, are forward-looking statements within the meaning of the Act.
The forward-looking statements are based on management's current views
and assumptions regarding future events and operating performance. However,
there are many risk factors, including but not limited to, the Company's
substantial leverage, the Company's ability to service its debt, the general
state of the economy, the Company's ability to execute its plans, fluctuations
of energy prices and availability, fluctuations of raw material prices,
competitive factors, and other risks that could cause the actual results to
differ materially from the estimates or predictions contained in our Company's
forward-looking statements. Additional information concerning the Company's risk
factors is contained from time to time in the Company's public filings with the
SEC; and most recently in the Business Risks section of Item 1 to Part 1 of our
2001 Annual Report on Form 10-K filed with the SEC on April 1, 2002.
The Company's views, estimates, plans and outlook as described within
this document may change subsequent to the release of this statement. The
Company is under no obligation to modify or update any or all of the statements
it has made herein despite any subsequent changes the Company may make in its
views, estimates, plans or outlook for the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning our market risks is contained in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of our 2001 Annual Report on Form 10-K, as filed with the
SEC on April 1, 2002.
This information has been omitted from this report as there have been
no material changes to our market risks as of June 30, 2002.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various claims and legal proceedings generally incidental to the normal
course of business are pending or threatened against us. While we cannot
predict the outcome of these matters, in the opinion of management, any
liability arising from these matters will not have a material adverse
effect on our business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
--Not applicable--
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
--None--
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended June 30, 2002.
ITEM 5. OTHER INFORMATION
14
--Not Applicable--
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
2.1 Reorganization, Recapitalization and Stock Purchase Agreement
dated as of June 29, 1998 by and between The Black & Decker
Corporation, True Temper Sports, Inc. and TTSI LLC
("Recapitalization Agreement") (filed as exhibit 2.1 to the
Company's Registration Statement on Form S-4 (No. 333-72343),
as filed with the Securities and Exchange Commission (the
"SEC") on February 13, 1999 (the "Form S-4")).*
2.2 Amendment No. 1 to Recapitalization Agreement dated August 1,
1998 (filed as exhibit 2.2 to Form S-4).*
2.3 Amendment No. 2 to Recapitalization Agreement dated September
30, 1998 (filed as exhibit 2.3 to Form S-4).*
2.4 Assignment and Assumption Agreement by and between True Temper
Corporation ("TTC") and the Company dated September 30, 1998
(filed as exhibit 2.4 to Form S-4).*
3.1 Amended and Restated Certificate of Incorporation of the
Company, dated September 29, 1998 (filed as Exhibit 3.1 to
Form S-4).*
3.2 By-laws of the Company (filed as Exhibit 3.2 to Form S-4).*
4.1 Indenture dated November 23, 1998 between the Company United
States Trust of New York (filed as Exhibit 4.1 to Form S-4).*
4.2 Purchase Agreement dated November 18, 1998 between the Company
and Donaldson, Lufkin and Jenrette (filed as Exhibit 4.2 to
Form S-4).*
10.1 Management Services Agreement dated as of September 30, 1998
between the Company and Cornerstone Equity Investors, LLC
("Management Services Agreement") (filed as Exhibit 10.1 to
Form S-4).*
10.2 Amendment to Management Services Agreement dated November 23,
1998 (filed as Exhibit 10.2 to Form S-4).*
10.3 Credit Agreement dated as of September 30, 1998 among the
Company, various financial institutions, DLJ Capital Funding,
Inc. and The First National Bank of Chicago (filed as Exhibit
10.3 to Form S-4).*
10.4 Securities Purchase Agreement dated as of September 30, 1998
among TTC and the Purchase Party thereto (filed as Exhibit
10.4 to Form S-4).*
10.5 Amendment No. 1 to Credit Agreement dated June 11, 1999 (filed
as Exhibit 10.5 to the Company's 1999 Annual Report on Form
10-K, as filed with the SEC on March 30, 2000).*
10.6 True Temper Corporation 1998 Stock Option Plan (filed as
Exhibit 10.6 to the Company's 1999 Annual Report on Form 10-K,
as filed with the SEC on March 30, 2000).*
10.7 Shareholder's Agreement dated as of September 30, 1998 (filed
as Exhibit 10.7 to the Company's 1999 Annual Report on Form
10-K, as filed with the SEC on March 30, 2000).*
15
10.8 Amended and Restated Management Services Agreement dated March
27, 2000 (filed as Exhibit 10.8 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 2,
2000, as filed with the SEC on May 16, 2000).*
10.9 Amendment No. 2 to Credit Agreement dated November 17, 2000
(filed as Exhibit 10.9 to the Company's Annual Report on Form
10-K, as filed with the SEC on March 28, 2001).*
10.10 Amendment No 3 to Credit Agreement dated December 4, 2001
(filed as Exhibit 10.10 to the Company's Annual Report on Form
10-K, as filed with the SEC on April 1, 2002).*
99.1 Statement, dated August 14, 2002, of Scott C. Hennessy, Chief
Executive Officer.
99.2 Statement, dated August 14, 2002, of Fred H. Geyer, Chief
Financial Officer.
b. Reports on Form 8-K
No reports or Form 8-K were filed during the quarter ended
June 30, 2002.
- ------------------
* Incorporated by reference.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Memphis, State of
Tennessee, on August 14, 2002.
True Temper Sports, Inc.
By:/s/ SCOTT C. HENNESSY
----------------------------------
Name: Scott C. Hennessy
Title: President and Chief Executive Officer
By:/s/ FRED H. GEYER
----------------------------------
Name: Fred H. Geyer
Title: Senior Vice President, Chief Financial
Officer, and Treasurer
17