Fitness financials: Nautilus to acquire Chinese contract manufacturer, plus Town Sports, Under Armour, adidas/Reebok

Nautilus to acquire Chinese contract manufacturer
Nautilus (NYSE: NLS) signed a purchase option agreement to acquire the assets of its largest contract manufacturer, Land America Health and Fitness Co., Ltd., which is based in Xiamen, China. Land America has manufactured the Bowflex home exercise gyms for more than eight years and began manufacturing Bowflex TreadClimber cardio trainers for the company last year.

The purchase option through June 30, 2007, gives Nautilus time to complete necessary due diligence and enter into definitive agreements, while extending procurement cost reductions through 2007. Consideration for the acquisition is approximately $72 million in cash and stock with an anticipated closing date of Dec. 31, 2007. The acquisition is expected to improve company gross margins by 1.5 to 2.0 percentage points in 2008.

The purchase option of Land America involves four modern buildings with about 700,000 square feet of manufacturing floor space on a 15-acre site in an economic development zone near Xiamen, China, as well as a trading company, Treuriver Investments Ltd. It employs from 1,500 to 4,000 people, depending on manufacturing needs.

The company will continue to work with its other contract manufacturing partners in Asia and its two domestic manufacturing plants to drive growth and improve margins.

Nautilus said it plans to discuss the agreement during its fourth quarter 2006 earnings call on Feb. 7.

Ryan Beck said in a client note that the acquisition will provide numerous operational benefits, as the Land America facilities have capacity to spare, giving Nautilus an opportunity to optimize operations as they are expanded. Plus, ownership of these facilities will improve the company’s negotiating power with its suppliers and other contract manufacturers.

Ryan Beck added: “We believe this is a very sound move for NLS. It is, in our view, an opportunistic move involving what we believe to be a motivated seller, and is another move that clearly signals management’s focus on commitment to expense management and bottom line growth.”

The brokerage said it will not make any changes to its estimate of $0.80 for FY06 and $0.95 for FY07. Its price target of $17 is based on an EV/EBITDA multiple of 8.5x applied to its FY07 EBITDA estimate of $67.3 million, which is relatively in line with the peer group.

Moody’s gives Town Sports buyback thumbs-up
Following the health club operator’s move to buyback notes, Moody’s Investors Service upgraded the corporate family rating of Town Sports International (Nasdaq: CLUB) on Feb. 1.

Moody’s upgraded the corporate family rating to ‘B1’ from ‘B2’ and the rating on its senior discount notes to ‘B3 from ‘Caa1’ with a stable outlook. The ratings remain non-investment grade.

On Jan. 29, Town Sports started a tender offer to buy back its outstanding 9 5/8 percent senior notes due 2011. The offer will expire Feb. 26, unless extended. The company expects to buy the shares with borrowings from a $185 million senior secured term loan facility, and will enter into a new $75 million senior secured revolver.

Moody’s said it would withdraw the ‘B2’ rating on the notes. It also upgraded to ‘B1’ from ‘B2’ the company’s probability of default rating.

Under Armour posts Q4, FY06 increases, but stock drops
Despite a 69.4-percent increase in fourth-quarter income, Under Armour (NYSE: UA) shares took a hit on the New York Stock Exchange when its earnings per share were a penny below analyst estimates. Shares fell $3.63, or 7.2 percent, to close at $47.17 on Feb. 1.

Fourth-quarter net income was $11.9 million compared to $7.0 million in the same period of 2005. Diluted earnings per share was $0.24, on weighted average common shares outstanding of 49.8 million compared to $0.08 per share on weighted average common shares outstanding of 44.1 million in the fourth quarter of the prior year. The company received a $1.0 million benefit to net income, or $0.02 per diluted share, as a result of the impact of state tax credits previously disclosed by the company.

Net revenues for the fourth quarter were up 55 percent to $135.3 million compared to net revenues of $87.3 million in the fourth quarter of 2005. Growth in apparel revenues accounted for $35.6 million of the year-over-year increase in net revenues for the quarter, the company said. Additionally, it reported $9.3 million in footwear revenues.

Net revenues for the year increased 53.2 percent to $430.7 million from $281.1 million in 2005. Net income increased 97.7 percent to $39.0 million compared to $19.7 million in the prior year. Diluted earnings per share was $0.79, on weighted average common shares outstanding of 49.6 million compared to $0.36 per share on weighted average common shares outstanding of 39.7 million in 2005. The company received a $3.3 million benefit to net income, or $0.07 per diluted share, as a result of the impact of state tax credits previously disclosed by the company.

For 2007, Under Armour said it expects annual net revenues in the range of $560 million to $580 million, an increase of 30 percent to 35 percent over 2006. The company expects 2007 income from operations to be in the range of $74.5 million to $77.5 million, an increase of 30 percent to 35 percent over 2006.

adidas anticipates billion-dollar growth from Reebok over next 3-5 years
adidas (ADSG.DE) said it expects growth overseas, particularly in Asia, to push sales at its Reebok division to Euro 3.8 billion (USD $5 billion) over the next three to five years, up from its current Euro 2.3 billion (USD $3 billion) level.

The company also reported that it expects to cut costs across the company — including at Reebok, which it acquired last year — by about Euro 87 million (USD $113 million) this year. These cost-cutting measures are expected to offset integration costs, resulting in an overall cost savings of about Euro 10 million to 20 million (USD $13 million to $26 million).

For the Reebok brand, adidas anticipates the main growth driver to be Asia, and to a certain extent Europe as well. It said key markets like Germany and France are underdeveloped, as is Russia. It added that emerging markets have a huge potential, and it will grow in the United States, but they will not reach the anticipated pace of Asia.

adidas bought Reebok a year ago in a $3.8 billion deal, looking to complement its strength in Europe with a major U.S. brand that had greater strength in the fashion segment. But the Reebok brand has been a drag on adidas’ performance. In November, the company lowered its 2007 profit growth forecast to 15 percent from 20 percent, citing trouble at Reebok.

(Conversion of Euros into U.S. dollars is for information only, is not necessarily relative to earnings, and is based on the currency rate as of Feb. 1.)

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