UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 3, 2005
or
o 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)
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Delaware |
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3949 |
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52-2112620 |
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(State or
other jurisdiction of |
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(Primary
Standard Industrial |
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(I.R.S.
Employer |
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 ý No o.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes o No ý.
As of May 17, 2005 the Registrant had 100 shares of Common Stock, $0.01 par value per share, outstanding.
TRUE TEMPER SPORTS, INC.
INDEX
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 1. Financial Statements
TRUE TEMPER SPORTS, INC.
(A wholly-owned subsidiary of True Temper Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
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Successor Company |
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Predecessor |
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Period from |
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Period from |
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Period from |
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NET SALES |
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$ |
32,103 |
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$ |
9,964 |
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$ |
20,247 |
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Cost of sales |
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19,234 |
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5,988 |
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11,871 |
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GROSS PROFIT |
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12,869 |
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3,976 |
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8,376 |
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Selling, general and administrative expenses |
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4,188 |
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564 |
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3,635 |
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Amortization of intangible assets |
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3,456 |
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— |
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— |
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Business development, start-up costs and transition costs |
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65 |
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83 |
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100 |
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Transaction and reorganization expenses |
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— |
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— |
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5,381 |
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Loss on early extinguishment of long-term debt |
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— |
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— |
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9,217 |
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OPERATING INCOME (LOSS) |
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5,160 |
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3,329 |
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(9,957 |
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Interest expense, net of interest income |
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4,767 |
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685 |
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2,498 |
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Other expenses (income), net |
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12 |
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2 |
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(2 |
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INCOME (LOSS) BEFORE INCOME TAXES |
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381 |
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2,642 |
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(12,453 |
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Income tax expense (benefit) |
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197 |
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1,045 |
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(2,845 |
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NET INCOME (LOSS) |
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$ |
184 |
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$ |
1,597 |
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$ |
(9,608 |
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See accompanying notes to condensed consolidated financial statements
1
TRUE TEMPER SPORTS, INC.
(A wholly-owned subsidiary of True Temper Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
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April 3, |
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December 31, |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
4,286 |
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$ |
3,337 |
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Receivables, net |
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20,137 |
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14,578 |
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Inventories |
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19,337 |
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21,910 |
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Prepaid expenses and other current assets |
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3,102 |
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3,533 |
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Total current assets |
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46,862 |
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43,358 |
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Property, plant and equipment, net |
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13,157 |
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13,407 |
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Goodwill, net |
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150,883 |
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150,883 |
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Intangible assets, net |
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142,810 |
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146,266 |
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Other assets |
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6,642 |
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6,911 |
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Total assets |
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$ |
360,354 |
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$ |
360,825 |
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LIABILITIES & STOCKHOLDER’S EQUITY |
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CURRENT LIABILITIES |
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Current portion of long-term debt |
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$ |
818 |
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$ |
545 |
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Accounts payable |
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5,350 |
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4,356 |
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Accrued expenses and other current liabilities |
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7,907 |
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9,796 |
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Total current liabilities |
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14,075 |
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14,697 |
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Deferred tax liability, net |
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5,531 |
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5,403 |
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Long-term debt, net of current portion |
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231,907 |
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232,180 |
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Other liabilities |
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7,342 |
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7,215 |
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Total liabilities |
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258,855 |
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259,495 |
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STOCKHOLDER’S EQUITY |
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Common stock — par value $0.01 per share; authorized 1,000 shares; issued and outstanding 100 shares |
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— |
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— |
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Additional paid-in capital |
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111,943 |
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111,943 |
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Accumulated deficit |
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(10,280 |
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(10,464 |
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Accumulated other comprehensive loss, net of taxes |
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(164 |
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(149 |
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Total stockholder’s equity |
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101,499 |
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101,330 |
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Total liabilities and stockholder’s equity |
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$ |
360,354 |
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$ |
360,825 |
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See accompanying notes to condensed consolidated financial statements
2
TRUE TEMPER SPORTS, INC.
(A wholly-owned subsidiary of True Temper Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
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Successor Company |
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Predecessor |
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Period from |
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Period from |
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Period from |
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OPERATING ACTIVITIES |
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Net income (loss) |
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$ |
184 |
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$ |
1,597 |
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$ |
(9,608 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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685 |
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78 |
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671 |
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Amortization of deferred financing costs |
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363 |
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— |
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109 |
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Amortization of intangible assets |
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3,456 |
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— |
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— |
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Transaction and reorganization expenses |
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— |
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— |
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5,381 |
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Loss on early extinguishment of long-term debt |
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— |
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— |
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9,217 |
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Deferred taxes |
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128 |
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1,081 |
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(3,015 |
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Changes in operating assets and liabilities, net |
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(3,391 |
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(2,155 |
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227 |
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Net cash provided by operating activities |
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1,425 |
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601 |
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2,982 |
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INVESTING ACTIVITIES |
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Purchase of property, plant and equipment |
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(435 |
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(42 |
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(330 |
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Net cash used in investing activities |
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(435 |
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(42 |
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(330 |
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FINANCING ACTIVITIES |
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Proceeds from issuance of bank debt |
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— |
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110,000 |
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— |
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Proceeds from issuance of Senior Subordinated Notes |
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— |
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125,000 |
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— |
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Principal payments on bank debt |
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— |
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— |
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(7,700 |
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Repay bank debt, including accrued interest |
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— |
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(6,335 |
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— |
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Call Senior Subordinated Notes, including accrued interest and call premium |
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— |
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(109,455 |
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— |
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Payment of debt issuance costs |
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— |
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(8,455 |
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— |
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Distribution of net equity to selling shareholders |
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— |
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(102,518 |
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— |
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Transaction and reorganization expenses, including cash payments for direct acquisition costs |
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— |
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(8,280 |
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(463 |
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Other financing activity |
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(41 |
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— |
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(42 |
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Net cash used in financing activities |
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(41 |
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(43 |
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(8,205 |
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Net increase (decrease) in cash |
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949 |
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516 |
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(5,553 |
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Cash at beginning of period |
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3,337 |
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2,836 |
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8,389 |
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Cash at end of period |
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$ |
4,286 |
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$ |
3,352 |
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$ |
2,836 |
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See accompanying notes to condensed consolidated financial statements
3
TRUE TEMPER SPORTS, INC.
(A wholly-owned subsidiary of True Temper Corporation)
NOTES TO CONDENSED CONSOLIDATED 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, 2004. In the opinion of management, the financial statements as of and for the periods ended April 3, 2005 and March 28, 2004 include all adjustments, consisting of only normal recurring 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.
On January 30, 2004, TTS Holdings LLC, a company formed by Gilbert Global Equity Partners, L.P. and its affiliated funds (“Gilbert Global”), entered into a stock purchase agreement with the Company’s direct parent company, True Temper Corporation, pursuant to which TTS Holdings LLC and certain of the Company’s senior management purchased all of the outstanding shares of True Temper Corporation. In connection with this acquisition, and effective on March 15, 2004, the Company repaid all of its outstanding 2002 senior credit facility, redeemed all of its 10 7/8% senior subordinated notes due 2008, and made certain payments of the net remaining equity of the predecessor company to the selling shareholders. These payments were financed with the net proceeds of a new senior credit facility and new 8 3/8% senior subordinated notes due 2011.
This transaction was accounted for by the Company’s parent company using the purchase method of accounting. As the Company is a wholly owned subsidiary of True Temper Corporation, the Company has “pushed down” the effect of the purchase method of accounting to these financial statements. These financial statements and accompanying notes 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 April 3, 2005, accordingly, the successor company presentation is not comparable to the predecessor company presentation due to the different basis of accounting. The financial statements have also been separated by a vertical dashed line into predecessor company and successor company results where necessary.
2) Inventories
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April 3, |
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December 31, |
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Raw materials |
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$ |
5,268 |
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$ |
4,601 |
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Work in process |
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2,072 |
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2,182 |
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Finished goods |
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11,997 |
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15,127 |
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Total |
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$ |
19,337 |
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$ |
21,910 |
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4
3) Segment Reporting
The Company operates in two reportable business segments: golf shafts and performance sports. 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 sports segment manufactures and sells high strength, tight tolerance tubular components for bicycle, hockey and other 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.
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Successor Company |
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Predecessor |
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Period from |
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Period from |
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Period from |
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Net sales: |
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Golf shafts |
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$ |
30,645 |
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$ |
9,379 |
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$ |
19,067 |
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Performance sports |
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1,458 |
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585 |
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1,180 |
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Total |
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$ |
32,103 |
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$ |
9,964 |
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$ |
20,247 |
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Gross profit: |
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Golf shafts |
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$ |
12,578 |
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$ |
3,801 |
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$ |
8,080 |
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Performance sports |
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291 |
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175 |
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296 |
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Total |
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$ |
12,869 |
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$ |
3,976 |
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$ |
8,376 |
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Following is a reconciliation of total reportable segment gross profit to total Company income (loss) before income taxes:
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Successor Company |
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Predecessor |
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Period from |
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Period from |
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Period from |
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Total reportable segment gross profit |
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$ |
12,869 |
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$ |
3,976 |
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$ |
8,376 |
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Less: |
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Selling, general and administrative expenses |
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4,188 |
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564 |
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3,635 |
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Amortization of intangible assets |
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3,456 |
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— |
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— |
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Business development, start-up costs and transition costs |
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65 |
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83 |
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100 |
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Transaction and reorganization expenses |
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— |
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— |
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5,381 |
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Loss on early extinguishment of long-term debt |
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— |
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— |
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9,217 |
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Interest expense, net of interest income |
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4,767 |
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685 |
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2,498 |
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Other expense (income), net |
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12 |
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2 |
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(2 |
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Total Company income (loss) before income taxes |
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$ |
381 |
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$ |
2,642 |
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$ |
(12,453 |
) |
5
4) Comprehensive Income
Total comprehensive income and its components for the periods covered by this report are as follows:
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Successor Company |
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Predecessor |
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Period from |
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Period from |
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Period from |
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Net income (loss) |
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$ |
184 |
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$ |
1,597 |
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$ |
(9,608 |
) |
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Mark to market adjustment on derivative instruments, net of taxes |
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(15 |
) |
75 |
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(121 |
) |
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Total comprehensive income (loss) |
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$ |
169 |
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$ |
1,672 |
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$ |
(9,729 |
) |
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5) Acquisition by Gilbert Global
On January 30, 2004, TTS Holdings LLC, a company formed by Gilbert Global, entered into a stock purchase agreement with the Company’s direct parent company, True Temper Corporation, pursuant to which TTS Holdings LLC and certain of the Company’s senior management purchased all of the outstanding shares of True Temper Corporation. In connection with this acquisition, and effective on March 15, 2004, the Company repaid all of its outstanding 2002 senior credit facility, redeemed all of its 10 7/8% senior subordinated notes due 2008, and made certain payments of the net remaining equity of the predecessor company to the selling shareholders. These payments were financed with the net proceeds of a new senior credit facility and new 8 3/8% senior subordinated notes due 2011.
The purchase price as stipulated in the January 30, 2004 stock purchase agreement totaled $342.0 million, plus direct acquisition costs and certain working capital adjustments of $18.4 million, less a purchase price adjustment for final working capital of $0.8 million. Following is the allocation of the total consideration paid:
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Current assets, excluding inventory |
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$ |
20,086 |
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Inventory |
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30,119 |
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Identifiable intangible assets: |
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|||
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Trade name |
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$ |
19,455 |
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Patented technology |
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11,686 |
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Purchased customer relationships |
|
121,524 |
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Lease contract |
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4,323 |
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Other |
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262 |
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|||
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Total identifiable intangible assets |
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157,250 |
|
|||
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Property, plant and equipment |
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14,684 |
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Deferred tax assets, net, existing at acquisition date |
|
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51,866 |
|
|||
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Deferred tax assets related to acquisition |
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10,552 |
|
|||
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Deferred financing costs |
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|
7,366 |
|
|||
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Goodwill |
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150,883 |
|
|||
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Other assets |
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|
95 |
|
|||
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Current liabilities |
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|
|
(12,475 |
) |
|||
|
Deferred tax liability related to intangible assets |
|
|
|
(59,680 |
) |
|||
|
Deferred tax liability related to fair value of inventory |
|
|
|
(4,432 |
) |
|||
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Other liabilities |
|
|
|
(6,656 |
) |
|||
|
Total |
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|
|
$ |
359,658 |
|
||
6
This transaction was accounted for by the Company’s parent company using the purchase method of accounting. As the Company is a wholly owned subsidiary of True Temper Corporation, the Company has “pushed down” the effect of the purchase method of accounting to these financial statements.
In connection with the acquisition, the Company conducted an assessment and valuation of all tangible and intangible assets acquired. The results of this exercise are reflected in the allocation table above. Of particular note was (i) the establishment of intangible assets in an aggregate amount of approximately $157.3 million based on both internal Company assessments and a thorough study conducted by an independent firm specializing in intangible asset valuation; and (ii) the write-up of inventory by approximately $11.7 million to reflect the estimated fair value of inventory at the date of acquisition. Both of these adjustments were completed in compliance with the purchase accounting prescribed by Statement of Financial Accounting Standards No. 141, Business Combinations, which the Company adopted on January 1, 2002.
The establishment of the intangible assets results in certain non-cash amortization expense beginning in 2004, as these intangible assets are amortized over their expected economic lives.
At the time of the transaction the predecessor company recorded certain transaction related expenses totaling $5.4 million. These expenses consist primarily of investment banking merger and acquisition fees, legal fees and other incidental costs and expenses typically incurred in an acquisition of this nature. Also, as a direct result of the early extinguishment of the predecessor company’s long-term debt, expenses totaling $9.2 million were incurred consisting primarily of the write-off of the remaining deferred financing costs related to the 10 7/8% senior subordinated notes due 2008 and the 2002 senior credit facility, and the early extinguishment call premium and related interest incurred when the Company redeemed the 10 7/8% senior subordinated notes on March 15, 2004.
The following unaudited pro forma financial information is presented as if the aforementioned transaction, and all related purchase accounting adjustments, had occurred as of January 1, 2004. The pro forma amounts contain certain adjustments, including, (i) an adjustment to interest expense to reflect the extinguishment of the 10 7/8% Senior Subordinated Notes due 2008 and the 2002 senior credit facility, and the issuance of the 8 3/8% Senior Subordinated Notes due 2011 and 2004 senior credit facility, (ii) the elimination of transaction and reorganization expenses and the loss on early extinguishment of long-term debt, which are both non-recurring, (iii) the additional charge to operating income for the amortization of intangible assets and (iv) the related tax effect of the adjustments described above.
|
|
|
Period from |
|
|
|
Net sales |
|
$ |
30,211 |
|
|
Income before income taxes |
|
$ |
3,968 |
|
|
Net income |
|
$ |
2,368 |
|
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 the Company’s 2004 Annual Financial Statements, including the notes thereto, appearing most recently in our 2004 Annual Report on Form 10-K, filed with the SEC on March 30, 2005.
Company Overview
True Temper Sports, Inc. (“True Temper” or the “Company”), a wholly owned subsidiary of True Temper Corporation (“TTC”), is a leading designer, manufacturer and marketer of steel, composite, and multi-material golf club shafts for original equipment manufacturers (“OEM’s”) and distributors in the golf equipment industry. In addition, True Temper produces and sells a variety of performance sports products that offer high strength and tight tolerance tubular components to the bicycle, hockey and other recreational sports markets. In calendar 2004, golf shaft sales represented 94% of total revenues, and performance sports sales represented 6%. This sales split has remained relatively consistent during the first quarter of 2005.
Purchase Agreement for True Temper Corporation
On January 30, 2004, TTS Holdings LLC, a company formed by Gilbert Global Equity Partners, L.P. and its affiliated funds (“Gilbert Global”), entered into a stock purchase agreement with the Company’s direct parent company, True Temper Corporation, pursuant to which TTS Holdings LLC and certain of the Company’s senior management purchased all of the outstanding shares of TTC (“Gilbert Global Acquisition”). In connection with this acquisition, and effective on March 15, 2004, the Company repaid all of its outstanding 2002 senior credit facility, redeemed all of its 10 7/8% senior subordinated notes due 2008, and made certain payments of the net remaining equity of the predecessor company to the selling shareholders. These payments were financed with the net proceeds of a new senior credit facility and new 8 3/8% senior subordinated notes due 2011.
The Gilbert Global Acquisition was accounted for by the Company’s parent company using the purchase method of accounting. As the Company is a wholly owned subsidiary of TTC, the Company has “pushed down” the effect of the purchase method of accounting to these financial statements. The Company’s financial statements and accompanying notes present the historical cost basis results of the Company as “predecessor” through March 14, 2004, and the results of the Company as “successor” from March 15, 2004 through April 3, 2005, accordingly, certain elements of the successor company presentation are not comparable to the predecessor company presentation due to the different basis of accounting.
For purposes of the following discussion regarding the Company’s results of operations and cash flow, the Company has combined the results of the predecessor and successor companies in 2004 in order to compare the results to the results in 2005. Material variances caused by the different basis of accounting have been disclosed where applicable.
8
Results of Operations
The following table sets forth the components of net income as a percentage of net sales for the periods indicated:
|
|
|
Successor |
|
Combined |
|
Predecessor |
|
Successor |
|
|
|
|
Period from |
|
Period from |
|
Period from |
|
Period from |
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Cost of sales |
|
59.9 |
|
59.1 |
|
58.6 |
|
60.1 |
|
|
Gross profit |
|
40.1 |
|
40.9 |
|
41.4 |
|
39.9 |
|
|
Selling, general and administrative expenses |
|
13.0 |
|
13.9 |
|
18.0 |
|
5.7 |
|
|
Amortization of intangible assets |
|
10.8 |
|
— |
|
— |
|
— |
|
|
Business development, start-up costs and transition costs |
|
0.2 |
|
0.6 |
|
0.5 |
|
0.8 |
|
|
Transaction and reorganization expenses |
|
— |
|
17.8 |
|
26.6 |
|
— |
|
|
Loss on early extinguishment of long-term debt |
|
— |
|
30.5 |
|
45.5 |
|
— |
|
|
Operating income (loss) |
|
16.1 |
|
(21.9 |
) |
(49.2 |
) |
33.4 |
|
|
Interest expense, net of interest income |
|
14.8 |
|
10.5 |
|
12.3 |
|
6.9 |
|
|
Other expenses (income), net |
|
— |
|
— |
|
— |
|
— |
|
|
Income (loss) before income taxes |
|
1.2 |
|
(32.5 |
) |
(61.5 |
) |
26.5 |
|
|
Income tax expense (benefit) |
|
0.6 |
|
(6.0 |
) |
(14.1 |
) |
10.5 |
|
|
Net income (loss) |
|
0.6 |
% |
(26.5 |
)% |
(47.5 |
)% |
16.0 |
% |
First Quarter Ended April 3, 2005 Compared to the First Quarter Ended March 28, 2004
Net Sales for the first quarter of 2005 increased $1.9 million, or 6.3%, to $32.1 million from $30.2 million in the first quarter of 2004. Golf shaft sales increased $2.2 million, or 7.7%, to $30.6 million compared to the $28.4 million realized in the first quarter of 2004. This improvement in revenue was driven by greater unit sales of both steel and graphite golf shafts. The increased unit volume can be attributed to several factors, including (i) increased demand for True Temper’s new product offerings such as the Dynamic Gold SL steel shaft and the Grafalloy ProLaunch graphite shaft, (ii) a greater number of successful new club introductions from several key OEM partners, specifically in the iron category, (iii) general reductions in the overall wholesale and retail channel inventory positions as compared to prior year levels, and (iv) increased acceptance and usage of the Company’s graphite golf shaft products in certain OEM partners’ custom option programs, primarily in the Grafalloy Blue and ProLaunch family of products. In addition to these unit volume drivers, the Company also experienced a favorable product mix within its premium steel golf shaft category which further benefited overall revenue.
Performance sports sales decreased $0.3 million, or 17.4%, to $1.5 million in the first quarter of 2005 from $1.8 million in the first quarter of 2004. This decline is reflective of the Company’s continued shift in product focus away from non-branded, non-sporting goods offerings, and to the growing bike and composite hockey markets. Sales to these key markets increased slightly between the first quarter of 2004 and first quarter of 2005.
Net sales to international customers increased $1.0 million, or 9.4%, to $12.0 million in the first quarter of 2005 from $11.0 million in the same period of 2004. This increase resulted primarily from the same overall golf industry drivers and True Temper specific issues described above.
Gross Profit for the first quarter of 2005 increased $0.5 million, or 4.2%, to $12.9 million from $12.4 million in the first quarter of 2004. Gross profit as a percentage of net sales decreased to 40.1% in the first quarter of 2005 from 40.9% in the first quarter of 2004. The decrease in gross profit as a percentage of net sales was driven primarily by (i) an increase in the cost of raw materials and natural gas and (ii) the unfavorable impact on gross profit margins resulting from the execution of the Company’s inventory reduction plan, which was initiated during the first quarter of 2005 and targets a full year reduction of $3.0 to $5.0 million in total
9
inventory. These two unfavorable factors were partially offset by (i) improved foreign currency exchange rates, (ii) increased selling prices and favorable product mix in the golf shaft category, and (iii) favorable operating improvements from productivity and cost control programs at the Company’s manufacturing facilities.
Selling, General and Administrative Expenses (“SG&A”) for the first quarter of 2005 remained relatively flat at $4.2 million when compared to the first quarter of 2004. SG&A as a percentage of net sales decreased to 13.0% in the first quarter of 2005 from 13.9% in the first quarter of 2004. This decrease in SG&A as a percentage of net sales was due primarily to the increase in sales between periods.
During the first quarter of 2005 the Company spent approximately $0.1 million on its initial compliance project related to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”). In 2004 the Company spent approximately $0.1 million on SOX initial compliance, all in the fourth quarter.
Amortization of Intangible Assets for the first quarter of 2005 was $3.5 million. Intangible assets were acquired in connection with the Gilbert Global Acquisition. Intangible assets with definitive lives are being amortized using a straight-line method over periods from 2 to 59 years. There was no amortization of intangible assets in the first quarter of 2004.
Business Development, Start-Up Costs and Transition Costs for the first quarter of 2005 decreased $0.1 million, to $0.1 million from $0.2 million in the first quarter of 2004. These costs represent various start-up business expenses related to the opening of the Company’s composite manufacturing operation in Southern China, and the related down-sizing costs incurred at the Company’s El Cajon, California facility.
Transaction and Reorganization Expenses for the first quarter of 2004 were $5.4 million and were incurred in conjunction with the Gilbert Global Acquisition which closed on March 15, 2004. These transaction related expenses include (i) investment banking merger and acquisition fees, (ii) legal fees, and (iii) other incidental costs and expenses related to the sale of TTC. No such transaction and reorganization expenses were incurred during the first quarter of 2005.
Loss on the Early Extinguishment of Long-Term Debt for the first quarter of 2004 was $9.2 million. The costs recorded as loss on the early extinguishment of long-term debt include (i) the write-off of the remaining deferred financing costs related to our 10 7/8% senior subordinated notes and the Company’s 2002 senior credit facility, and (ii) the early extinguishment call premium and related interest the Company incurred when the Company redeemed the 10 7/8% senior subordinated notes on March 15, 2004. No long-term debt was extinguished during the first quarter of 2005.
Operating Income (Loss) for the first quarter of 2005 was an operating income of $5.2 million as compared to an operating loss of $6.6 million in the first quarter of 2004. This increase reflects the profit impact of the items described above.
Interest Expense for the first quarter of 2005 increased to $4.8 million from $3.2 million in the first quarter of 2004. This increase was driven primarily by the increase in outstanding principal amounts of variable rate bank debt and fixed rate bonds, offset somewhat by a decrease in the interest rate on the Company’s fixed rate debt between periods.
Income Tax Expense (Benefit)increased in the first quarter of 2005 to an income tax expense of $0.2 million compared to an income tax benefit of $1.8 million in the first quarter of 2004. 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. For the period from January 1, 2004 through March 14, 2004 the effective tax rate also differs due to the nondeductible nature of a portion of transaction and reorganization expenses.
Net Income (Loss) for the first quarter of 2005 increased to $0.2 million of income as compared to $8.0 million of a net loss in the first quarter of 2004. This increase reflects the profit impact of the items described above.
10
Liquidity and Capital Resources
General
As part of the Gilbert Global Acquisition the Company entered into a new senior credit facility (the “2004 Senior Credit Facility”) which includes a $20.0 million non-amortizing revolving credit facility and a $110.0 million Term B loan (as amended from time to time). The term loan requires cash interest payments and quarterly principal payments beginning June 30, 2004 and continuing through March 15, 2011.
Also in conjunction with the Gilbert Global Acquisition the Company issued new 8 3/8% Senior Subordinated Notes due 2011 (the “8 3/8% Notes”). The 8 3/8% Notes require cash interest payments each March 15th and September 15th commencing on September 15, 2004. The 8 3/8% Notes are redeemable at the Company’s option, under certain circumstances and at certain redemption prices, beginning March 15, 2008.
The Company used the proceeds from the 2004 Senior Credit Facility and the 8 3/8% Notes to pay off the existing debt that was outstanding at closing on March 15, 2004, and to make a distribution of the net remaining equity to the selling shareholders.
Both the 2004 Senior Credit Facility and the 8 3/8% Notes contain covenants and events of default, including substantial restrictions and provisions which, among other things, limit the Company’s 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 2004 Senior Credit Facility also requires the Company to maintain certain specified financial ratios and tests including minimum interest coverage and fixed charge coverage ratios, and maximum leverage ratios. Furthermore, the 2004 Senior Credit Facility requires certain mandatory prepayments including payments from the net proceeds of certain asset sales and a portion of the Company’s excess cash flow as defined within the credit agreement.
On September 24, 2004 the Company executed an amendment to its 2004 Senior Credit Facility (the “Amendment”). The Amendment provided adjustments to certain specified financial ratios and tests included in the 2004 Senior Credit Facility. As part of the Amendment, the margin adder on LIBOR based loans was increased from 2.50% to between 2.75% and 3.00%, depending on financial ratios, beginning September 24, 2004 and continuing through December 31, 2005. At April 3, 2005 the Company was in compliance with all of the covenants in both the 2004 Senior Credit Facility and the 8 3/8% Notes.
First Quarter Ended April 3, 2005 Compared to the First Quarter Ended March 28, 2004
Net cash provided by operating activities declined $2.2 million between periods. This decline relates primarily to the change in the Company’s semi-annual payment dates for interest on its fixed rate notes. During the first quarter of 2005 the Company paid cash interest on its 8 3/8% Notes totaling $5.2 million. Cash interest on fixed rate debt did not affect cash provided by operations in the first quarter of 2004, as it was included as part of the financing activity completed in conjunction with the Gilbert Global Acquisition.
Net cash used in investing activities remained relatively consistent as the Company spent $0.4 million during the first quarter of 2005 and 2004 for capital expenditures.
The Company used less than $0.1 million cash for financing activities in the first quarter of 2005 as compared to $8.2 million in the first quarter of 2004. The 2004 activity was the result of the Gilbert Global Acquisition as noted above. On March 15, 2004, the proceeds from issuing the 2004 Senior Credit Facility and the proceeds from issuing the 8 3/8% Notes, plus cash generated from operations during the first quarter, and cash on hand at the beginning of that quarter were used to (i) repay the outstanding principal and interest on the Company’s 2002 senior credit facility, (ii) redeem and repay the 10 7/8% Notes including accrued and unpaid interest and early redemption call premium, (iii) pay for debt issuance costs on the 2004 senior credit facility and the 8 3/8% Notes, (iv) pay for transaction and reorganization expenses, and (v) make a distribution of the net remaining equity to the selling shareholders.
11
Existing Contractual Cash Obligations
The following table reflects the Company’s contractual cash obligations for long-term debt and capital and operating leases as of April 3, 2005 (dollars in millions):
|
|
|
Total |
|
2005 |
|
2006 |
|
2008 |
|
Thereafter |
|
|||||
|
Long-Term Debt(1) |
|
$ |
232.7 |
|
$ |
0.5 |
|
$ |
2.2 |
|
$ |
2.2 |
|
$ |
227.8 |
|
|
Operating Leases |
|
2.7 |
|
0.8 |
|
1.4 |
|
0.5 |
|
— |
|
|||||
|
Total(2) |
|
$ |
235.4 |
|
$ |
1.3 |
|
$ |
3.6 |
|
$ |
2.7 |
|
$ |
227.8 |
|
(1) Our long-term debt agreements contain customary change of control provisions that could, under certain circumstances, cause accelerated debt repayment.
(2) This table does not include our future obligations related to the funding of our pension benefits.
Future Cash Generation and Use
Currently our intention is to use existing cash and cash provided from future operations, if any, as allowed within the covenants of the 2004 Senior Credit Facility and the 8 3/8% Notes, to:
• Repay the principal on the 2004 Senior Credit Facility; and / or
• To make additional investments in the business for growth, which may include, among other things, capital expenditures, business acquisitions, and/or expenditures for business development and expansion in China.
In addition to the debt service obligations for principal and interest payments, the Company’s liquidity needs largely relate to working capital requirements and capital expenditures for machinery and equipment. The Company intends to fund its 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 April 3, 2005 the Company has the $20.0 million revolving credit facility available for future cash requirements. The maximum amount the Company may use of the $20.0 million revolving credit facility is limited by the financial covenants contained within the 2004 Senior Credit Facility.
In addition to the Company’s cash obligations for interest and principal payments related to its debt obligations, the Company also has a management services agreement with an affiliate of Gilbert Global, which requires the payment of an annual advisory fee of $0.5 million.
Depending on the size, any future acquisitions, joint ventures, capital expenditures or similar transactions may require significant capital resources in excess of cash provided from 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.
Impact of Recently Issued Accounting Standards
In December 2004, the FASB issued Statement No. 123 (revised December 2004), Share-Based Payment (“Statement 123(R)”). Statement 123(R) replaces FASB Statement 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or the liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. Statement 123(R) is effective as of the beginning of the first annual
12
reporting period that begins after June 15, 2005. The Company does not believe the adoption of Statement 123(R) will have a material impact on the Company’s consolidated financial condition or results of operations taken as a whole.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 indicates that “abnormal” amounts of idle facility expense, freight, handling costs, and wasted materials should be recognized as current-period charges (when actual production defect rates vary significantly from expected rates) and requires the allocation of fixed production overheads to inventory based on the “normal capacity”, as defined, of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has not yet determined the impact, if any, of adopting SFAS No. 151.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by the 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 future operating or financial performance, events or developments that the Company expects, plans, believes, hopes, wishes, forecasts, predicts, intends, or anticipates 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 in the price and availability of energy, fluctuations in the price and availability of raw materials, potentially significant increases to employee health and welfare costs, competitive factors, and other risks that could cause the actual results to differ materially from the estimates or predictions contained in the 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 the Company’s 2004 Annual Report on Form 10-K filed with the SEC on March 30, 2005.
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.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The table below provides information about the Company’s debt obligations as of April 3, 2005 that are sensitive to changes in interest rates. The table presents cash flows and related weighted average interest rates by expected maturity dates (dollars in millions).
|
|
|
Expected Maturity Date |
|
|
|
|||||||||||||||||
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Thereafter |
|
Total |
|
|||||||
|
LONG TERM DEBT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Fixed-Rate 8 3/8% Senior Subordinated Notes |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
125.0 |
|
$ |
125.0 |
|
|
Average Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
8.38 |
% |
8.38 |
% |
|||||||
|
Variable Rate Senior Credit Facility |
|
$ |
0.5 |
|
$ |
1.1 |
|
$ |
1.1 |
|
$ |
1.1 |
|
$ |
1.1 |
|
$ |
102.8 |
|
$ |
107.7 |
|
|
Average Interest Rate (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
5.83 |
% |
|||||||
(a) Variable rate long-term debt is comprised of term loans under the 2004 Senior Credit Facility, which provides for interest at the Company’s option, at (1) the base rate of the bank acting as administrative agent plus a margin adder of 2.00%, or (2) under a LIBOR option with a borrowing spread of LIBOR plus 2.50% to 3.00%, depending on certain financial ratios.
The Company’s operating results are affected by changes in interest rates primarily as a result of borrowings under the 2004 Senior Credit Facility. If interest rates increased by 25 basis points, interest expense would have increased by approximately $0.1 million for the quarterly period ended April 3, 2005, based on balances outstanding during the quarterly period then ended.
Information concerning the Company’s market risks related to foreign exchange rates and commodities is contained in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s 2004 Annual Report on Form 10-K, as filed with the SEC on March 30, 2005. This information has been omitted from this report as there have been no material changes to the Company’s risks related to foreign exchange rates and commodities as of April 3, 2005.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Evaluations required by Rule 13a-15 of the Securities Exchange Act of 1934 of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report have been carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer. Based upon such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There have been no changes in the Company’s internal controls over financial reporting during the period covered by this Report that were identified in connection with the evaluation referred to above that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
14
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 the Company’s 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 April 3, 2005.
Item 5. Other Information
—Not Applicable—
Item 6. Exhibits
|
1.1 |
|
Purchase Agreement, dated as of March 3, 2004, among True Temper Sports, Inc., Credit Suisse First Boston LLC and Goldman, Sachs & Co. (filed as Exhibit 1.1 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
|
|
|
|
|
4.1 |
|
Indenture, dated as of March 15, 2004, among True Temper Sports, Inc., the Guarantors identified therein, and The Bank of New York (filed as Exhibit 4.1 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
|
|
|
|
|
4.2 |
|
Form of Senior Subordinated Note due 2011 (filed as Exhibit 4.2 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
|
4.3 |
|
Registration Rights Agreement, dated as of March 15, 2004, among True Temper Sports, Inc., El Cajon Equipment Corporation, True Temper Sports-PRC Holdings, Inc., Credit Suisse First Boston LLC and Goldman, Sachs & Co (filed as Exhibit 4.3 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
|
|
|
|
|
10.1 |
|
Management Services Agreement, dated as of March 15, 2004, between GGEP Management, L.L.C., GGEP Management (Bermuda) Ltd., and True Temper Sports, Inc. (filed as Exhibit 10.1 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
15
|
10.2 |
|
Shareholders Agreement, dated as of March 15, 2004, by and among True Temper Corporation, TTS Holdings LLC and the Other Investors identified therein (filed as Exhibit 10.2 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
|
|
|
|
|
10.3 |
|
True Temper Corporation 2004 Equity Incentive Plan, dated as of March 15, 2004 (filed as Exhibit 10.3 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
|
|
|
|
|
10.4 |
|
Credit Agreement, dated as of March 15, 2004, by and among True Temper Corporation, True Temper Sports, Inc, the Lenders identified therein, Credit Suisse First Boston, Antares Capital Corporation, Goldman Sachs Credit Partners L.P. and Merrill Lynch Capital (filed as Exhibit 10.4 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
|
10.5 |
|
Tax Sharing and Administrative Services Agreement, dated as of March 15, 2004, by and among True Temper Corporation, True Temper Sports, Inc., El Cajon Equipment Corporation and True Temper Sports-PRC Holdings, Inc. (filed as Exhibit 10.5 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
|
|
|
|
|
10.6 |
|
Employment Agreement, dated as of January 30, 2004, by and between True Temper Sports, Inc. and Scott C. Hennessy (filed as Exhibit 10.6 to True Temper Sports, Inc.’s Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on April 13, 2004).* |
|
|
|
|
|
10.7 |
|
First Amendment, dated as of September 24, 2004, to the Credit Agreement, dated as of March 15, 2004, by and among True Temper Corporation, True Temper Sports, Inc, the Lenders identified therein, Credit Suisse First Boston, Antares Capital Corporation, Goldman Sachs Credit Partners L.P. and Merrill Lynch Capital (filed as Exhibit 10.1 to True Temper Sports, Inc.’s report on Form 8-K, as filed with the Securities and Exchange Commission on September 30, 2004).* |
|
|
|
|
|
31.1 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002** |
|
|
|
|
|
31.2 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002** |
* Incorporated by reference.
** Filed herewith
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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 May 17, 2005.
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True Temper Sports, Inc. |
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By: |
/s/ SCOTT C. HENNESSY |
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Name: Scott C. Hennessy |
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Title: |
President and Chief Executive Officer |
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By: |
/s/ JASON A. JENNE |
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Name: Jason A. Jenne |
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Title: |
Vice President, Chief Executive Officer |
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