The Company is principally engaged in the business of designing, manufacturing and marketing graphite (carbon fiber based composite) golf club shafts, with approximately 92% of its net sales resulting from sales to golf club manufacturers for inclusion in their clubs. As a result, the Company’s operating results are substantially dependent not only on demand by its customers for the Company’s shafts, but also on demand by consumers for clubs including graphite shafts such as the Company’s.
In 1998, the Company established a manufacturing facility in Evanston, Wyoming for the production of carbon fiber. During 1998 and through the first ten months of 1999, the Company used the material from this facility to satisfy a significant portion of its internal demand for carbon fiber in the manufacturing of golf club shafts. During 1999, the Company also produced and sold carbon fiber from this facility to other unrelated entities for the manufacture of other carbon-based products. On October 29, 1999, SGL Carbon Fibers and Composite, Inc. (“SGL”) purchased a 50% interest in the Company’s carbon fiber manufacturing operation. The Company and SGL entered into an agreement to operate the facility as a limited liability company with equal ownership interests between the venture partners. The Company and SGL also entered into supply agreements with the new entity, Carbon Fiber Technology LLC (“CFT”), for the purchase of carbon fiber at cost plus an agreed upon mark-up. Profits and losses of CFT are shared equally by the partners. The Company anticipates that the carbon fiber from this facility will primarily be consumed by the joint venture partners; however, any excess carbon fiber produced at this facility could be marketed for sale to unrelated third parties. The Company does not expect third party sales at CFT nor the sale of graphite prepreg to have a significant effect on either its sales or profitability for several years.
Historically, graphite shafts have principally been offered by manufacturers of higher priced, premium golf clubs, and the Company’s sales have been predominantly of premium graphite shafts. However, in recent years the Company has realized substantial sales growth in the value priced segment of the graphite shaft market. The Company now competes aggressively with primarily United States based shaft manufacturers for premium graphite shafts and also against primarily foreign based shaft manufacturers for lower priced value shaft sales. The Company continues to maintain a broad customer base in the premium shaft market segment. While the Company’s market share in the value segment is not as great as the premium segment, the Company has advanced rapidly in securing new customers in this segment in recent years. Presently, there exists substantial excess graphite shaft manufacturing capacity both in the United States and in other countries. This has had the effect, and is expected by management to continue to have the effect for at least the next several years, of decreasing the selling prices of the Company’s shafts. Although the Company’s gross profit margin is being adversely affected by the reduction in selling prices, the adverse effects on gross margin have been mitigated in the past to some extent by efforts being taken by the Company to control costs, including obtaining lower prices for its raw materials and manufacturing its own graphite prepreg, and should be mitigated to some extent in the future as the Company increases the percentage of its shafts being manufactured in countries with lower labor and overhead costs.
In recent years, the Company’s results of operations have been materially affected on several occasions by dramatic year-to-year changes in sales to an individual golf club manufacturer customer. Such changes can result either from decisions by the customer to increase or decrease shaft purchases from an alternative supplier or from the traditional volatility in consumer demand for specific clubs. The Company believes that this volatility is likely to continue in the future, particularly as club manufacturers seek to gain competitive advantages through an increased rate of technological innovation in club design. The Company’s results will benefit whenever it has an opportunity to supply shafts for the latest “hot” club and will be adversely affected whenever sales of clubs containing Aldila shafts drop dramatically. In particular, in recent years, a significant portion of the Company’s sales has tended to be concentrated among several customers, thereby making the Company’s results of operations dependent to a large extent on continued sales to Callaway Golf, Ping and TaylorMade. In 2000, sales to Callaway Golf, Ping and TaylorMade represented 21%, 19% and 15%, respectively, of the Company’s total net sales. The Company expects Callaway Golf, Ping and TaylorMade to continue to be the Company’s largest customers, at least through 2001. The Company believes that while it will often not be possible to predict, with any certainty, shifts in demand for particular clubs, the Company’s broad range of club manufacturer customers should reduce in some cases the extent of the impact on the Company’s financial results.
Results of Operations
First Quarter 2001 Compared to First Quarter 2000
Net Sales. Net sales decreased $2.1 million, or 12.8%, to $14.6 million for the first quarter ended March 31, 2001 (the “2001 Period”) from $16.7 million for the first quarter ended 2000 (the “2000 Period”). The decrease in net sales was attributable to decreased shaft unit sales to the Company’s club manufacturer customers which was partially offset by an increase in the average selling price of shafts sold. Shaft unit sales decreased 24.8% in the 2001 Period as compared to the 2000 Period, and the average selling price of shafts sold increased 13.3%, partly as a result of a change in product mix.
Gross Profit. Gross profit increased $1.2 million, or 39.0%, to $4.2 million for the 2001 Period from $3.0 million for the 2000 Period. The increase was primarily attributed to the lack of a charge in the current period of $1.2 million, which appeared as a charge to cost of sales in the 2000 Period for the higher cost inventories from 1999 which were carried over to the 2000 Period. The Company’s gross profit margin increased to 28.5% in the 2001 Period compared to 17.9% in the 2000 Period, as a result of higher average selling prices for shafts and the lack of the $1.2 million charge in the current period.
Operating Income. Operating income increased $0.4 million, or 28.6%, to $1.7 million for the 2001 Period from $1.3 million for the 2000 Period. Operating income in the 2000 Period had a benefit of $0.6 million from a partial recovery of previously taken plant consolidation charges. Operating income increased as a percentage of net sales to 11.6% in the 2001 Period compared to 7.9% in the 2000 Period. Selling, general and administrative expense increased as a percentage of net sales to 14.4% for the 2001 Period compared to 11.2% for the 2000 Period, primarily as a result of increased marketing activities.
Income Before Income Taxes. Income before income taxes increased $0.5 million to $1.7 million for the 2001 Period from $1.2 million for the 2000 Period. The majority of the increase is attributed to the increase in operating income.
Income Taxes. The Company recorded a provision for income taxes of $0.7 million in the 2001 Period compared to $0.6 million in the 2000 Period. The effective tax rate was 42.3% for the 2001 period compared to 51.8% for the 2000 period. The decrease in the effective tax rate is primarily attributed to increased activity in foreign operations. The Company should continue to realize a reduced effective tax rate to the extent that the statutory income tax rates where it has foreign operations are lower than the statutory income tax rates in the United States and to the extent the Company has sufficient income to absorb its non-deductible amortization of goodwill.
Liquidity and Capital Resources
The Company has in place a $12.0 million revolving credit facility from a financial institution which is secured by substantially all the assets of Aldila Golf and guaranteed by the Company. Borrowings under the line of credit bear interest, at the election of the Company, at the bank reference rate or at the adjusted Eurodollar rate plus 2.5%. Availability for borrowings under the Line of Credit was approximately $6.3 million as of March 31, 2001. The Company has $4.0 million in principal amount of senior notes outstanding which bear interest at 6.13%. The final principal payment of $4.0 million, plus accrued interest, is due September 30, 2001.
Cash (including cash equivalents) used for operating activities in the 2001 Period was $0.4 million compared to $0.7 million provided by operating activities for the 2000 Period. This decrease resulted principally from the increased cash used for working capital items in the 2001 Period as compared to the 2000 Period. The Company used $0.1 million for capital expenditures during the 2001 Period. Management anticipates capital expenditures to approximate $1.0 million for 2001. The Company may also incur capital expenditures over the next several years to expand and enhance the production capacity of the CFT operation in Evanston, Wyoming in order to take advantage of new opportunities brought to CFT and further reduce production costs for the carbon fiber acquired by the Company, in addition to an obligation to support one half of CFT’s fixed annual cost. The Company believes that it will have adequate cash resources, including anticipated cash flow and borrowing availability to meet its obligations at least through 2001.
The Company may from time to time consider the acquisition of businesses. The Company could require additional debt financing if it were to engage in a material acquisition in the future.
Seasonality
Because the Company’s customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment, the Company’s operating results have been affected by seasonal demand for golf clubs, which has generally resulted in the highest sales occurring in the second quarter. The timing of customers’ new product introductions has frequently mitigated the impact of seasonality in recent years.
“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995
With the exception of historical information (information relating to the Company’s financial condition and results of operations at historical dates or for historical periods), the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that necessarily are based on certain assumptions and are subject to certain risks and uncertainties. These forward-looking statements are based on management’s expectations as of the date hereof, that necessarily contain certain assumptions and are subject to certain risks and uncertainties. The Company does not undertake any responsibility to update these statements in the future. The Company’s actual future performance and results could differ from that contained in or suggested by these forward looking statements as a result of a variety of factors.
The Company’s Report on Form 10-K for the year ended December 31, 2000 (the “Form 10-K”) presents a more detailed discussion of these and other risks related to the forward-looking statements in this 10-Q, in particular under “Business Risks” in Part I, Item 1 of the Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 7 of the Form 10-K. The forward-looking statements in this 10-Q are particularly subject to the risks that
| Ÿ | we will not maintain or increase our market share at our principal customers; |
| Ÿ | demand for clubs manufactured by our principal customers will decline, thereby affecting their demand for our shafts; |
| Ÿ | our principal customers will be unwilling to satisfy a significant portion of their demand with shafts manufactured in Mexico or China instead of with shafts manufactured in the United States; |
| Ÿ | new product offerings will not achieve success with consumers or OEM customers; |
| Ÿ | we will not achieve success marketing shafts to club assemblers based in China; |
| Ÿ | our international operations will be adversely affected by political instability, currency fluctuation, export/import regulation and other risks typical of multi-national operations, particularly those operating in less developed countries; and |
| Ÿ | CFT will be unsuccessful as a result, for example, of internal operational problems, raw material supply problems, changes in demand for carbon fiber based products, or difficulties in operating a joint venture. |
PART II - OTHER INFORMATION
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.
| Dated: | | ALDILA, INC. |
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| May 11, 2001 | | \s\ Robert J. Cierzan
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| | | Robert J. Cierzan |
| | | Vice President, Finance |
| | | Signing both in his capacity as |
| | | Vice President and as Chief |
| | | Accounting Officer of the Registrant |
