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Action Performance Reports Fiscal Third Quarter 2004 Earnings - Management Reports Revenue Growth Over the Same Period Last Year

Action Performance Companies, Inc. (NYSE: ATN), the leader in the design, marketing, promotion, and distribution of licensed motorsports merchandise, today reported financial results for the third quarter and first nine months of fiscal 2004.

The company reported revenues of $92.2 million for the quarter ended June 30, 2004, an increase of $4.7 million, or 5.3%, over revenues of $87.5 million for the same period last year. Action’s third quarter net income after charges discussed below totaled $3.8 million, or $0.21 per share, compared to third quarter 2003 net income of $6.3 million or $0.35 per share. Revenues for the 2004 quarter included $6.5 million from Funline acquired in September 2003. Income in 2004 included a loss of $196 thousand from the translation of foreign currency compared to a gain of $820 thousand from the currency translation in the 2003 quarter.

On a sequential basis, the company reported a 10.2% gain in revenue and a 198% increase in net income from the second to third quarters of 2004. EBITDA and free cash flow increased on a sequential basis to $14.0 million and $9.7 million, respectively, from $9.7 million and $922 thousand in the second quarter.

For the nine-month period, the company reported revenues of $247.0 million compared with $263.6 million for the first nine months of 2003. The company reported net income of $3.4 million or $0.18 per share for the first nine months of 2004 after deducting charges, aggregating $6.2 million in the first three quarters of the fiscal year. Net income for the nine months ended June 30, 2003, was $21.5 million or $1.18 per share. Revenues for 2004 included $30.1 million from Funline and net income included a gain in 2004 of $377 thousand from foreign currency conversions compared to a gain of $3.1 million in 2003.

"We’re pleased to report our second sequential increase in Action’s quarterly profit," Action Chief Executive Officer Fred Wagenhals said. "Clearly, our company is experiencing positive momentum both financially and operationally as evidenced by these results and our recent agreement to a five-year licensing relationship with race team Hendrick Motorsports. Our contract secures all Hendrick drivers, including Jimmie Johnson and Jeff Gordon through 2011. Johnson and Gordon are currently ranked No. 1 and No. 3 respectively in the 2004 NEXTEL Cup championship standings."

Charges had a total impact of $0.10 on third quarter 2004 earnings per share. The charges were related to distributor receivable charge-offs, charges for Jeff Hamilton inventory write-downs, products sold with a negative margin of $0.8 million, and provisions for royalty guarantees.

Prior to the charges affecting cost of goods sold, Action’s gross margins were 34.6% compared to 35.4% in the preceding year and 28.9% in the prior quarter. The improvement from the last quarter has resulted from improved internal controls over product pricing and the previously reported price increase. SG&A expenses approximated similar expenses from the quarter ended June 30, 2003, after adjusting for Funline SG&A expenses, which were not in the comparable 2003 period.

In July 2004, management took steps to strengthen its long-standing distributor network and improve the quality of its accounts receivable by suspending shipments to three slow or non-paying distributors. "The measures taken this quarter were both necessary and beneficial to our company, enabling us to focus on our performing distributors," said Wagenhals.

Action Chief Financial Officer R. David Martin said, "While we’re pleased with Action’s second consecutive quarter of increased profit and cash flow, we’re not content with our level of achievement. While die-cast revenues increased from $38.9 million in the second quarter to $49.5 million in the third quarter, we are experiencing a slower-than-expected rebound in demand for our products. Factors impacting results included lower than expected die-cast orders, some mass retail order cancellations, softness in trackside retail, and Jeff Hamilton NBA products. However, our wholesale die-cast quarterly revenue increased 112% sequentially to $25.7 million."

Inventory turnover was 4.2 times at June 30, 2004 compared to 5.9 times at June 30, 2003, and 4.2 times at March 31, 2004. Without Funline, inventory turnover was 5.1 times at June 30, 2004. Inventories increased $21.7 million from June 30, 2003, primarily due to the $15.0 million of Funline that were not included in June 30, 2003, amounts, $4.7 million of increases in Jeff Hamilton and McArthur inventories, and a $2.6 million increase in in-transit inventories. Martin noted that "Funline inventories increased $1.9 million from the second quarter to accommodate the fall mass retail programs in which Funline shelf space has significantly increased. In addition, McArthur inventories reflect an increase in order backlog. Both Funline and McArthur inventories are expected to return to normal levels by September."

Receivable DSO’s were 49.0 days compared to 52.1 days at June 30, 2003 and 57.4 days at March 31, 2004. Receivables, including $4.2 million from Funline were $49.6 million compared to $50.1 million at June 30, 2003, and $52.8 million at March 31, 2004. This represents an actual decline of $0.5 million and a pro forma decline of $4.7 million from June 30, 2003, and a decline of $3.2 million from March 31, 2004, in spite of increases in revenues in the June quarter over each period. Receivables also declined $20.3 million from September 30, 2003.

Cash of $53.5 million increased from $34.0 million at the end of the March 2004 quarter. The increase in cash reflects $10.8 million from the draw-down of the term loans provided under the company’s new $75 million Credit Agreement, net of transaction costs. Action will retire the remaining $29.9 million of 4.75% convertible notes on August 2, 2004.

Martin noted that "The retirement of the 4.75% convertible notes represents a ‘watershed event’ in the company’s history. Four years ago when the notes were trading at less than 25% of their face value, there was little expectation that they would be redeemed prior to maturity. The retirement of these notes combined with our new four year $75.0 million credit facility will allow the company additional flexibility in deploying future expected cash flows, including acquisitions and common stock repurchases."

The company expects CAPEX in the fourth quarter to be $6.0 million, bringing total expected CAPEX for the year to $26.0 million.

Click Here for more detailed information on Actions Fiscal Third Quarter 2004 Earnings.

Source: Action Performance Companies Inc.
Date: July 28, 2004

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