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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 SEPTEMBER 29, 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 November 13, 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 nine month periods ended
September 29, 2002 (Unaudited) and September 30, 2001 (Unaudited)............ 1
Condensed Balance Sheets as of September 29, 2002 (Unaudited) and
December 31, 2001 (Unaudited)................................................ 2
Condensed Statements of Cash Flows for the nine month periods ended
September 29, 2002 (Unaudited) and September 30, 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
Item 4 Controls and Procedures ..................................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 15
Item 2. Changes in Securities and Use of Proceeds.................................... 15
Item 3. Defaults Upon Senior Securities.............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......................... 15
Item 5. Other Information............................................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................. 15
Signatures.................................................................................... 17
Certifications................................................................................ 18
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 NINE
MONTHS ENDED MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales .................................... $ 22,010 $ 20,012 $ 81,264 $ 88,956
Cost of sales ................................ 13,305 12,249 48,976 53,953
-------- -------- -------- --------
GROSS PROFIT .............................. 8,705 7,763 32,288 35,003
Selling, general and administrative expenses . 3,282 2,989 10,657 12,375
Amortization of goodwill ..................... -- 675 -- 2,025
Loss on early extinguishment of long-term debt -- -- 20 --
-------- -------- -------- --------
OPERATING INCOME .......................... 5,423 4,099 21,611 20,603
Interest expense, net of interest income ..... 2,978 3,178 9,147 9,538
Other expenses (income), net ................. 2 (11) 10 1
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ................ 2,443 932 12,454 11,064
Income taxes ................................. 990 651 4,884 5,041
-------- -------- -------- --------
NET INCOME ................................ $ 1,453 $ 281 $ 7,570 $ 6,023
======== ======== ======== ========
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)
SEPTEMBER 29, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................. $ 18,985 $ 8,177
Receivables, net ........................................................... 13,066 13,459
Inventories ................................................................ 14,387 13,441
Prepaid expenses and other current assets .................................. 1,610 1,749
-------- --------
Total current assets .................................................. 48,048 36,826
Property, plant and equipment, net ............................................ 15,134 16,729
Goodwill, net ................................................................. 71,506 71,506
Deferred tax assets, net ...................................................... 55,634 60,356
Other assets .................................................................. 3,469 3,913
-------- --------
Total assets .......................................................... $193,791 $189,330
======== ========
LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt .......................................... $ 1,275 $ 4,675
Accounts payable ........................................................... 3,705 4,390
Accrued expenses and other current liabilities ............................. 8,769 4,836
-------- --------
Total current liabilities ............................................. 13,749 13,901
Long-term debt less the current portion ....................................... 111,422 111,829
Other liabilities ............................................................. 2,431 2,297
-------- --------
Total liabilities ..................................................... 127,602 128,027
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 .......................................................... 25,863 20,977
-------- --------
Total stockholder's equity ............................................ 66,189 61,303
-------- --------
Total liabilities and stockholder's equity ............................ $193,791 $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 NINE
MONTHS ENDED
------------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2002 2001
------------- -------------
OPERATING ACTIVITIES
Net income ...................................................................... $ 7,570 $ 6,023
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 2,478 4,478
Amortization of deferred financing costs ..................................... 523 486
Loss on disposal of property, plant and equipment ............................ 9 3
Loss on early extinguishment of long-term debt ............................... 20 --
Deferred taxes ............................................................... 4,722 4,913
Changes in operating assets and liabilities, net ............................. 2,990 (2,331)
-------- --------
Net cash provided by operating activities .................................. 18,312 13,572
INVESTING ACTIVITIES
Purchase of property, plant and equipment ....................................... (892) (1,809)
Proceeds from sales of property, plant and equipment ............................ -- 24
-------- --------
Net cash used in investing activities ...................................... (892) (1,785)
FINANCING ACTIVITIES
Principal payments on bank debt ................................................. (3,537) (1,332)
Repurchase of Senior Subordinated Notes ......................................... (282) --
Principal payments on capital leases ............................................ (18) (19)
Dividends paid .................................................................. (2,684) (2,684)
Other financing activity ........................................................ (91) (107)
-------- --------
Net cash used in financing activities ...................................... (6,612) (4,142)
Net increase in cash ............................................................... 10,808 7,645
Cash at beginning of period ........................................................ 8,177 4,168
-------- --------
Cash at end of period .............................................................. $ 18,985 $ 11,813
======== ========
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
$2.0 million for the nine month period ended September 30, 2001.
The following table indicates what the net income amount would have been
in the prior year had amortization of goodwill not been recorded.
4
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
For the Three Months Ended
---------------------------------------------------------
September 29,
2002 September 30, 2001
------------- ------------------------------------------
Add Back
Goodwill
As Reported Amortization As Adjusted
----------- ------------ -----------
Income before income taxes $2,443 $ 932 $ 675 $1,607
Income taxes .......... 990 651 23 674
------ ------ ------ ------
Net Income ............... $1,453 $ 281 $ 652 $ 933
====== ====== ====== ======
For the Nine Months Ended
---------------------------------------------------------
September 29,
2002 September 30, 2001
------------- ------------------------------------------
Add Back
Goodwill
As Reported Amortization As Adjusted
----------- ------------ -----------
Income before income taxes $12,454 $11,064 $ 2,025 $13,089
Income taxes .......... 4,884 5,041 68 5,109
------- ------- ------- -------
Net Income ............... $ 7,570 $ 6,023 $ 1,957 $ 7,980
======= ======= ======= =======
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 nine 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.
3) INVENTORIES
SEPTEMBER 29, DECEMBER 31,
2002 2001
------------- ------------
Raw materials .......... $ 1,446 $ 1,558
Work in process ........ 2,191 2,124
Finished goods ......... 10,750 9,759
------- -------
Total .................. $14,387 $13,441
======= =======
5
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
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.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales:
Golf shafts ...... $21,046 $19,215 $78,053 $86,040
Performance tubing 964 797 3,211 2,916
------- ------- ------- -------
Total ......... $22,010 $20,012 $81,264 $88,956
======= ======= ======= =======
Gross profit:
Golf shafts ...... $ 8,502 $ 7,515 $31,458 $34,088
Performance tubing 203 248 830 915
------- ------- ------- -------
Total ......... $ 8,705 $ 7,763 $32,288 $35,003
======= ======= ======= =======
6
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Following is a reconciliation of total reportable segment gross profit to
total Company income before income taxes:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Total reportable segment gross profit ....... $ 8,705 $ 7,763 $32,288 $35,003
Less:
Selling, general & administrative expenses 3,282 2,989 10,657 12,375
Amortization of goodwill ................. -- 675 -- 2,025
Loss on early extinguishment of
long-term debt ........................ -- -- 20 --
Interest expense, net of interest income . 2,978 3,178 9,147 9,538
Other expenses, net ...................... 2 (11) 10 1
------- ------- ------- -------
Total Company income before income taxes .... $ 2,443 $ 932 $12,454 $11,064
======= ======= ======= =======
6) SUBSEQUENT EVENT
During October of 2002 True Temper made a voluntary repayment of $12.4
million to eliminate the outstanding principal balance of both the term A and
term B loans under the senior credit facility.
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 nine months 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 NINE
MONTHS ENDED MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 60.4 61.2 60.3 60.7
Gross profit............................... 39.6 38.8 39.7 39.3
SG&A expenses.............................. 14.9 14.9 13.1 13.9
Amortization of goodwill................... 0.0 3.4 0.0 2.3
Loss on early extinguishment of
long-term debt........................ 0.0 0.0 0.0 0.0
Operating income........................ 24.6 20.5 26.6 23.2
Interest expenses.......................... 13.5 15.9 11.3 10.7
Other expenses, net........................ 0.0 -0.1 0.0 0.0
Income before income taxes.............. 11.1 4.7 15.3 12.4
Income taxes............................... 4.5 3.3 6.0 5.7
Net income.............................. 6.6% 1.4% 9.3% 6.8%
Other Information:
EBITDA..................................... 28.4% 27.9% 29.6% 28.2%
Adjusted EBITDA............................ 28.9% 28.5% 30.1% 28.6%
(See definitions of EBITDA and Adjusted EBITDA contained herein.)
THIRD QUARTER ENDED SEPTEMBER 29, 2002 COMPARED TO THE THIRD QUARTER ENDED
SEPTEMBER 30, 2001
NET SALES for the third quarter of 2002 increased $2.0 million, or 10.0%,
to $22.0 million from $20.0 million in the third quarter of 2001. Golf shaft
sales increased $1.8 million, or 9.5%, to $21.0 million in the third quarter of
2002 from $19.2 million in the third quarter of 2001. This increase was driven
primarily by increased unit sales volume in premium grade steel shafts which
have strengthened with the introduction of new lighter weight steel products and
a pre-build at various golf club manufacturers for their late 2002 / early 2003
product launches.
8
Performance tubing sales increased $0.2 million, or 21.0%, to $1.0 million
in the third quarter of 2002 from $0.8 million in the third quarter of 2001.
Net sales to international customers increased approximately $3.3 million,
or 73.4%, to $7.7 million in the third quarter of 2002 from $4.5 million in the
third quarter of 2001. This increase was driven primarily by increased unit
sales volume in premium grade steel shafts which have strengthened with the
introduction of new lighter weight steel products and a pre-build at various
golf club manufacturers for their late 2002 / early 2003 product launches. In
addition export sales have grown with the continued shift of golf club assembly
operations to Southeast Asia. Lastly, we recognized modest improvements from
favorable changes in foreign currency exchange rates in the third quarter of
2002.
GROSS PROFIT for the third quarter of 2002 increased $0.9 million, or
12.1%, to $8.7 million from $7.8 million in the third quarter of 2001. Gross
profit as a percentage of net sales increased to 39.6% in the third quarter of
2002 from 38.8% in the third 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 third
quarter of 2002 increased $0.3 million, or 9.8%, to $3.3 million from $3.0
million in the third quarter of 2001. SG&A as a percentage of net sales in the
third quarter of 2002 remained flat when compared to the third quarter of 2001.
The increase in SG&A spending was driven primarily by increased hiring and
relocation expenses incurred during the third quarter of 2002, and the timing of
expenses recorded for management incentive programs.
OPERATING INCOME for the third quarter of 2002 increased by $1.3 million,
or 32.3%, to $5.4 million from $4.1 million in the third quarter of 2001.
Operating income as a percentage of net sales increased to 24.6% in the third
quarter of 2002 from 20.5% in the third 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 third quarter of 2001 goodwill amortization was $0.7 million.
Excluding the effect of goodwill amortization in the third quarter 2001,
operating income for the third quarter of 2002 would have increased by $0.6
million, or 13.6% from the third quarter of 2001 and operating income as a
percentage of net sales would have increased to 24.6% from 23.9%. 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 third quarter of 2002 decreased to $3.0 million
from $3.2 million in the third quarter of 2001.
INCOME TAXES for the third quarter of 2002 increased to $1.0 million from
$0.7 million in the third 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 third
quarter of 2001 the pre-tax income added back for the non-deductible portion of
goodwill amortization.
NET INCOME for the third quarter of 2002 increased by $1.2 million to $1.5
million from $0.3 million in the third quarter 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.
9
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 third quarter of 2002 and 2001 are
calculated as follows:
FOR THE THREE MONTH
PERIOD ENDED
---------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2002 2001
------------- -------------
Operating income .......... $5,423 $4,099
Plus:
Depreciation ........... 821 807
Amortization of goodwill -- 675
------ ------
EBITDA .................... 6,244 5,581
Plus:
Management service fees 125 125
------ ------
ADJUSTED EBITDA ........... $6,369 $5,706
====== ======
The increase in Adjusted EBITDA of $0.7 million, or 11.6%, 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.
NINE MONTH PERIOD ENDED SEPTEMBER 29, 2002 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 2001
NET SALES for the first nine months of 2002 decreased $7.7 million, or
8.6%, to $81.3 million from $89.0 million in the first nine months of 2001. Golf
shaft sales decreased approximately $8.0 million, or 9.3%, to $78.1 million in
the first nine months of 2002 from $86.0 million in the first nine 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 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 a pre-build at various
golf club manufacturers for their late 2002 / early 2003 product launches.
Performance tubing sales increased $0.3 million, or 10.1%, to $3.2 million
in the first nine months of 2002 from $2.9 million in the first nine months of
2001.
Net sales to international customers increased $4.3 million, or 25.1%, to
$21.4 million in the first nine months of 2002 from $17.1 million in the first
nine months of 2001. This increase was driven primarily by increased unit sales
volume in premium grade steel shafts which have strengthened with the
introduction of new lighter weight steel products and a pre-build at various
golf club manufacturers for their late 2002 / early 2003 product launches. In
addition export sales have grown with the continued shift of golf club assembly
operations to Southeast Asia. Lastly, we recognized modest improvements from
favorable changes in foreign currency exchange rates in 2002.
GROSS PROFIT for the first nine months of 2002 decreased $2.7 million, or
7.8%, to $32.3 million from $35.0 million in the first nine months of 2001.
Gross profit as a percentage of net sales increased to 39.7% in the first nine
months of 2002 from 39.3% in the first nine 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 margin products,
decreases in the cost of natural gas, and the cumulative year to date favorable
impact from changes in the foreign currency exchange rate between the US Dollar
and other currencies. These favorable factors were somewhat offset by increased
costs for medical insurance and other inflation factors.
10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") for the first nine
months of 2002 decreased $1.7 million, or 13.9%, to $10.7 million from $12.4
million in the first nine months of 2001. SG&A as a percentage of net sales
decreased to 13.1% in the first nine months 2002 from 13.9% in the first nine
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 nine months of 2002 increased by $1.0
million, or 4.9%, to $21.6 million from $20.6 million in the first nine months
of 2001. Operating income as a percentage of net sales increased to 26.6% in the
first nine months of 2002 from 23.2% in the first nine 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 nine months of 2001 goodwill amortization was $2.0
million . Excluding the effect of goodwill amortization in the first nine months
2001, operating income for the first nine months of 2002 would have decreased by
$1.0 million, or 4.5% from the first nine months of 2001 and operating income as
a percentage of net sales would have increased to 26.6% from 25.4%. 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 nine months of 2002 decreased to $9.2
million from $9.5 million in the first nine months of 2001.
INCOME TAXES for the first nine months of 2002 decreased to $4.9 million
from $5.0 million in the first nine 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 nine months of 2001 the pre-tax income added back for the non-deductible
portion of goodwill amortization.
NET INCOME for the first nine months of 2002 increased by $1.5 million to
$7.6 million from $6.0 million in the first nine 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.
11
EBITDA and Adjusted EBITDA for the first nine months of 2002 and 2001 are
calculated as follows:
FOR THE NINE MONTH
PERIOD ENDED
----------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2002 2001
------------- -------------
Operating income ................................ $21,611 $20,603
Plus:
Depreciation ................................. 2,478 2,453
Amortization of goodwill ..................... -- 2,025
------- -------
EBITDA .......................................... 24,089 25,081
Plus:
Management service fees ...................... 375 375
Loss on early extinguishment of long-term debt 20 --
------- -------
ADJUSTED EBITDA ................................. $24,484 $25,456
======= =======
The decrease in Adjusted EBITDA of $1.0 million, or 3.8%, 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.
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 NINE MONTH
PERIOD ENDED
------------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2002 2001
------------- -------------
Net cash provided by operating activities $ 18,312 $ 13,572
Net cash used in investing activities ... (892) (1,785)
Net cash used in financing activities ... $ (6,612) $ (4,142)
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 September 29, 2002 the outstanding principal
balance for the term A loan was $1.0 million and the outstanding principal
balance for the term B loan was $12.0 million. During October of 2002 we made a
voluntary repayment of $12.4 million to eliminate the outstanding principal
balance of both the term A and term B loans.
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. 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 September 29, 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
12
financial ratios and tests including minimum EBITDA levels, minimum interest
coverage and fixed charge coverage ratios, and maximum leverage ratios. At
September 29, 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 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.
NINE MONTH PERIOD ENDED SEPTEMBER 29, 2002 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 2001
In the first nine months of 2002 cash provided by operating activities
increased by approximately $4.7 million to $18.3 million from $13.6 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 and payable between comparative periods.
We used $0.9 million of cash to invest in property, plant and equipment in
the first nine months of 2002, compared to the $1.8 million spent in the first
nine months of 2001.
We repaid $3.5 million of the principal on our senior credit facility
during the first nine months of 2002, compared to the $1.3 million that we
repaid during the first nine 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 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 (in October of 2002 we made a
voluntary repayment of $12.4 million to eliminate the outstanding
principal balance of term A and term B loans), 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 and/or redeem 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 September 29, 2002 we have the $20.0 million revolving
credit facility available for future cash requirements. The Company's early
repayment in October of 2002 of the outstanding principal for its term A and
term B loans does not affect the revolving credit facility. 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.
13
FORWARD-LOOKING STATEMENTS
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 September 29, 2002.
ITEM 4 CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer along with the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that
evaluation, the Company's Chief Executive Officer along with the Company's Chief
Financial Officer concluded that as of November 12, 2002 the Company's
disclosure controls and procedures (1) were effective in alerting them, in a
timely manner, to material information relating to the Company required to be
included in the Company's periodic SEC filings and (2) were adequate to ensure
that information required to be disclosed by the Company in the reports filed or
submitted by the Company under the Exchange Act is recorded, processed and
summarized and reported within the time periods specified in the SEC's rules and
forms.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
14
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 September 29, 2002.
ITEM 5. OTHER INFORMATION
--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).*
15
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).*
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).*
b. Reports on Form 8-K
No reports or Form 8-K were filed during the quarter ended September
29, 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 November 13, 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
CERTIFICATIONS
I, Scott C. Hennessy, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of True Temper Sports,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
By: /s/ SCOTT C. HENNESSY
------------------------------------------------
Name: Scott C. Hennessy
Title: President and Chief Executive Officer
18
CERTIFICATIONS
I, Fred H. Geyer, Senior Vice President, Chief Financial Officer, and Treasurer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of True Temper Sports,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
By: /s/ FRED H. GEYER
------------------------------------------------
Name: Fred H. Geyer
Title: Senior Vice President, Chief Financial
Officer & Treasurer
19