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EXCEL - IDEA: XBRL DOCUMENT - EASTON-BELL SPORTS, INC. | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - EASTON-BELL SPORTS, INC. | c24402exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - EASTON-BELL SPORTS, INC. | c24402exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - EASTON-BELL SPORTS, INC. | c24402exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
o | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-123927
EASTON-BELL SPORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
20-1636283 (I.R.S. Employer Identification No.) |
7855 Haskell Avenue, Suite 200
Van Nuys, California 91406
(Address of Principal Executive Offices)(Zip Code)
Van Nuys, California 91406
(Address of Principal Executive Offices)(Zip Code)
(818) 902-5800
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
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 o No þ.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ.
As of November 15, 2011, 100 shares of Easton-Bell Sports, Inc. common stock were outstanding.
Table of Contents
EXPLANATORY NOTE
The Company is a voluntary filer of reports required of companies with public securities under
Sections 13 or 15(d) of the Securities Exchange Act of 1934.
2
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
INDEX
3
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
October 1, | January 1, | |||||||
2011 | 2011 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 23,641 | $ | 24,024 | ||||
Accounts receivable, net |
231,933 | 216,166 | ||||||
Inventories, net |
145,411 | 141,093 | ||||||
Prepaid expenses |
3,838 | 7,080 | ||||||
Deferred taxes |
15,976 | 16,254 | ||||||
Other current assets |
9,299 | 8,483 | ||||||
Total current assets |
430,098 | 413,100 | ||||||
Property, plant and equipment, net |
52,724 | 49,736 | ||||||
Deferred financing fees, net |
13,147 | 14,248 | ||||||
Intangible assets, net |
271,807 | 279,047 | ||||||
Goodwill |
206,928 | 206,928 | ||||||
Other assets |
1,654 | 1,495 | ||||||
Total assets |
$ | 976,358 | $ | 964,554 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Revolving credit facility |
$ | 36,000 | $ | 38,893 | ||||
Current portion of capital lease obligations |
25 | 24 | ||||||
Accounts payable |
66,509 | 73,148 | ||||||
Accrued expenses |
71,754 | 58,452 | ||||||
Total current liabilities |
174,288 | 170,517 | ||||||
Long-term debt, less current portion |
346,541 | 346,168 | ||||||
Capital lease obligations, less current portion |
59 | 78 | ||||||
Deferred taxes |
52,292 | 49,379 | ||||||
Other noncurrent liabilities |
18,516 | 20,774 | ||||||
Total liabilities |
591,696 | 586,916 | ||||||
Stockholders equity: |
||||||||
Common stock: $0.01 par value, 100 shares
authorized, 100 shares issued and
outstanding at October 1, 2011 and January
1, 2011 |
| | ||||||
Additional paid-in capital |
362,810 | 360,223 | ||||||
Retained earnings |
22,963 | 15,401 | ||||||
Accumulated other comprehensive (loss) income |
(1,111 | ) | 2,014 | |||||
Total stockholders equity |
384,662 | 377,638 | ||||||
Total liabilities and stockholders equity |
$ | 976,358 | $ | 964,554 | ||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited and amounts in thousands)
Fiscal Quarter Ended | Three Fiscal Quarters Ended | |||||||||||||||
October 1, | October 2, | October 1, | October 2, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 212,467 | $ | 198,834 | $ | 627,778 | $ | 595,695 | ||||||||
Cost of sales |
136,808 | 129,245 | 417,137 | 392,403 | ||||||||||||
Gross profit |
75,659 | 69,589 | 210,641 | 203,292 | ||||||||||||
Selling, general and administrative expenses |
54,294 | 49,015 | 156,681 | 144,302 | ||||||||||||
Amortization of intangibles |
2,339 | 2,589 | 7,240 | 9,175 | ||||||||||||
Income from operations |
19,026 | 17,985 | 46,720 | 49,815 | ||||||||||||
Interest expense, net |
10,635 | 11,132 | 32,728 | 33,807 | ||||||||||||
Income before income taxes |
8,391 | 6,853 | 13,992 | 16,008 | ||||||||||||
Income tax expense |
3,713 | 3,863 | 6,430 | 7,935 | ||||||||||||
Net income |
4,678 | 2,990 | 7,562 | 8,073 | ||||||||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation adjustment |
(4,398 | ) | 2,887 | (3,125 | ) | 373 | ||||||||||
Comprehensive income |
$ | 280 | $ | 5,877 | $ | 4,437 | $ | 8,446 | ||||||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and amounts in thousands)
Three Fiscal Quarters Ended | ||||||||
October 1, | October 2, | |||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 7,562 | $ | 8,073 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
21,406 | 21,803 | ||||||
Amortization of deferred financing fees and debt discount |
2,487 | 2,591 | ||||||
Deferred financing fees written-off |
120 | | ||||||
Equity compensation expense |
2,587 | 2,656 | ||||||
Deferred income taxes |
3,191 | 3,494 | ||||||
Disposal of property, plant and equipment |
29 | 6 | ||||||
Changes in operating assets and liabilities, net of effects from purchase of
businesses: |
||||||||
Accounts receivable, net |
(16,851 | ) | (9,924 | ) | ||||
Inventories, net |
(5,022 | ) | 870 | |||||
Other current and noncurrent assets |
2,267 | 4,738 | ||||||
Accounts payable |
(6,482 | ) | (8,616 | ) | ||||
Accrued expenses |
13,435 | 21,925 | ||||||
Other current and noncurrent liabilities |
(2,258 | ) | 209 | |||||
Net cash provided by operating activities |
22,471 | 47,825 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property, plant and equipment |
(17,134 | ) | (14,403 | ) | ||||
Purchase of businesses, net of cash acquired |
| (1,750 | ) | |||||
Net cash used in investing activities |
(17,134 | ) | (16,153 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from revolving credit facility |
43,778 | 7,000 | ||||||
Payments on revolving credit facility |
(46,671 | ) | (45,000 | ) | ||||
Payments on capital lease obligations |
(18 | ) | (17 | ) | ||||
Payment of debt issuance costs |
(1,133 | ) | | |||||
Net cash used in financing activities |
(4,044 | ) | (38,017 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
(1,676 | ) | (413 | ) | ||||
Net change in cash and cash equivalents |
(383 | ) | (6,758 | ) | ||||
Cash and cash equivalents, beginning of period |
24,024 | 33,318 | ||||||
Cash and cash equivalents, end of period |
$ | 23,641 | $ | 26,560 | ||||
See accompanying notes to consolidated financial statements.
6
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
1. Basis of Presentation
Easton-Bell Sports, Inc. is a wholly-owned subsidiary of RBG Holdings Corp., or RBG, which, in
turn, is a wholly-owned subsidiary of EB Sports Corp., or EB Sports, of which 100% of the issued
and outstanding voting common stock is owned by Easton-Bell Sports, LLC, the ultimate parent
company, or our Parent. Unless otherwise indicated, all references in this Form 10-Q to
Easton-Bell, we, us, our, and the Company refer to Easton-Bell Sports, Inc. and its consolidated
subsidiaries. References to Easton, Bell and Riddell refer to Easton Sports, Inc. and its
consolidated subsidiaries, Bell Sports Corp. and its consolidated subsidiaries and Riddell Sports
Group, Inc. and its consolidated subsidiaries, respectively.
The accompanying unaudited consolidated financial statements included herein have been
prepared by our Company in accordance with accounting principles generally accepted in the United
States, or GAAP, for interim financial information and the rules and regulations of the Securities
and Exchange Commission, or the SEC. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, normal
recurring adjustments considered necessary for a fair presentation have been reflected in these
consolidated financial statements. These unaudited consolidated financial statements should be read
in conjunction with our Companys audited financial statements and notes thereto included in our
Companys Annual Report on Form 10-K for the year ended January 1, 2011. Results for interim
periods are not necessarily indicative of the results for the year.
Our Companys fiscal quarters are 13-week periods ending on Saturdays. As a result, our
Companys third quarter of fiscal year 2011 ended on October 1, and the third quarter of fiscal
year 2010 ended on October 2.
2. Goodwill and Other Intangible Assets
Acquired intangible assets are as follows:
October 1, 2011 | January 1, 2011 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amounts | Amortization | Amounts | Amortization | |||||||||||||
Amortized intangible assets: |
||||||||||||||||
Trademarks and tradenames |
$ | 1,702 | $ | (1,702 | ) | $ | 1,702 | $ | (1,702 | ) | ||||||
Customer relationships |
59,180 | (37,392 | ) | 59,180 | (35,166 | ) | ||||||||||
Patents |
60,345 | (41,110 | ) | 60,345 | (36,275 | ) | ||||||||||
Licensing and other |
5,900 | (5,900 | ) | 5,900 | (5,721 | ) | ||||||||||
Total |
$ | 127,127 | $ | (86,104 | ) | $ | 127,127 | $ | (78,864 | ) | ||||||
Indefinite-lived intangible assets: |
||||||||||||||||
Trademarks and tradenames |
$ | 230,784 | $ | 230,784 | ||||||||||||
Goodwill by segment is as follows:
Team | Action | |||||||||||
Sports | Sports | Consolidated | ||||||||||
Balance as of October 1, 2011 |
$ | 145,464 | $ | 61,464 | $ | 206,928 |
Goodwill and other indefinite-lived intangible assets are tested for impairment at each of our
Companys segments on an annual basis in December, and more often if indications of impairment
exist as required under the Financial Accounting Standards Board or the FASBs Accounting Standards
Codification 350-20 Goodwill. The results of our Companys analyses conducted in 2010 indicated
that no impairment in the carrying amount of goodwill and other indefinite-lived intangible assets
had occurred. During the first three fiscal quarters of 2011, there were no indicators of
impairment to goodwill and intangible assets. There were no acquisitions and no material changes to
goodwill during the first three fiscal quarters of 2011.
7
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
3. Long-Term Debt
Long-term debt consisted of the following:
October 1, 2011 | January 1, 2011 | |||||||
9.750% Senior Secured Notes |
$ | 350,000 | $ | 350,000 | ||||
Senior Secured Credit ABL Facility |
36,000 | 38,893 | ||||||
Capital lease obligations |
84 | 102 | ||||||
Total long-term debt |
386,084 | 388,995 | ||||||
Less unamortized debt discount on senior secured notes |
(3,459 | ) | (3,832 | ) | ||||
Less current maturities of long-term debt |
(36,025 | ) | (38,917 | ) | ||||
Long-term debt, less current portion |
$ | 346,600 | $ | 346,246 | ||||
9.750% Senior Secured Notes
In December 2009, in connection with the refinancing of our Companys then-existing
indebtedness, or the Refinancing, we issued $350,000 of 9.750% Senior Secured Notes, due December
2016, or the Notes. Interest is payable on the Notes semi-annually on June 1 and December 1 of each
year. We may redeem some or all of the Notes prior to December 1, 2012 at a price equal to 100.00%
of the principal amount, plus accrued and unpaid interest and a make-whole premium. We may redeem
all or any of the Notes on or after December 1, 2012 and prior to December 1, 2013 at 107.313% of
the principal amount of the Notes, plus accrued and unpaid interest. Then we may redeem all or any
of the Notes on or after December 1, 2013 and prior to December 1, 2014 at 104.875% of the
principal amount of the Notes, plus accrued and unpaid interest. Then we may redeem all or any of
the Notes on or after December 1, 2014 and prior to December 1, 2015 at 102.438% of the principal
amount of the Notes, plus accrued and unpaid interest. At any time on or after December 1, 2015,
our Company may redeem all or any of the Notes at 100.00% of the principal amount of the Notes,
plus accrued and unpaid interest. In addition, during any twelve month period commencing on the
issue date prior to December 1, 2012, we may redeem up to 10% of aggregate principal amount of the
Notes at a price equal to 103.00% of their principal amount, plus accrued and unpaid interest. At
any time prior to December 1, 2012, we may also redeem up to 35.00% of the aggregate principal
amount of the Notes at a price equal to 109.750% of the principal amount of the Notes, plus accrued
and unpaid interest, with the net cash proceeds of one or more equity offerings of our Company. We
are not required to make mandatory redemption or sinking fund payments with respect to the Notes.
However, the Notes will become due and payable on October 1, 2015 unless on or prior to August 28,
2015, the indebtedness of EB Sports under its senior secured credit agreement with Wachovia Bank,
N.A. and the lenders party thereto, or the New Holdco Facility, has been either repaid or
refinanced with indebtedness with a stated maturity that is at least 91 days after the maturity
date of the Notes.
Among other provisions, the indenture governing the Notes contains certain restrictions that
limit our Companys ability to (1) incur, assume or guarantee additional debt, (2) pay dividends
and make other restricted payments, (3) create liens, (4) use the proceeds from sales of assets and
subsidiary stock, (5) enter into sale and leaseback transactions, (6) enter into agreements that
restrict dividends from subsidiaries, (7) change our business, (8) enter into transactions with
affiliates and (9) transfer all or substantially all of our assets or enter into merger or
consolidation transactions. The indenture governing the Notes also requires us to make an offer to
repurchase the Notes at 101.00% of the principal amount following a change of control of our
Company, and at 100.00% of the principal amount with the proceeds of certain sales of assets and
subsidiary stock.
Subject to certain exceptions, the indenture governing the Notes permits our Company and our
restricted subsidiaries to incur additional indebtedness, including senior indebtedness and secured
indebtedness. In addition, the indenture will not limit the amount of indebtedness that our direct
or indirect parent entities, including EB Sports and RBG, may incur.
8
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
The ABL Facility
Concurrently with the issuance of the Notes on December 3, 2009, our Company entered into a
$250,000 senior secured asset-based revolving credit facility, subject to availability under each
of a United States and Canadian borrowing base, under which the amount, subject to certain
conditions, may be increased to allow borrowings of up to $300,000, together with certain of our
subsidiaries as Canadian Borrowers (as defined therein) or Guarantors (as defined therein), with
JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, the other agents party
thereto and the lenders party thereto, or the ABL Facility. The unused portion of the ABL Facility
(subject to borrowing base availability) is to be drawn from time to time for general corporate
purposes (including permitted acquisitions) and working capital needs. At October 1, 2011, we had
$36,000 outstanding under the ABL facility and $174,708 in availability.
Certain of our Companys wholly-owned domestic subsidiaries, and all subsidiaries that
guarantee the Notes (currently only our wholly-owned domestic subsidiaries) guarantee all of our
obligations (both United States and Canadian) under the ABL Facility. In addition, our wholly-owned
Canadian subsidiaries guarantee the obligations of the Canadian borrowings under the Canadian
sub-facility of the ABL Facility. Furthermore, we and our wholly-owned domestic subsidiaries,
subject to certain exceptions, grant security with respect to substantially all of our personal
property as collateral for our obligations (and related guarantees) under the ABL Facility,
including a first-priority security interest in cash and cash equivalents, lockbox and deposit
accounts, accounts receivable, inventory, other personal property relating to such inventory and
accounts receivable and all proceeds therefrom and a second-priority security interest in
substantially all of our equipment and all assets that secure the Notes on a first-priority basis.
The obligations of our Canadian subsidiaries that are borrowers under the Canadian sub-facility of
the ABL Facility are secured, subject to certain exceptions and permitted liens, on a
first-priority lien basis, by substantially all of the assets of our wholly-owned Canadian
subsidiaries and by our and our domestic subsidiaries assets on the same basis as borrowings under
the ABL Facility. At October 1, 2011, we had a zero balance outstanding under the Canadian ABL
facility.
On May 13, 2011, our Company entered into an Amendment and Restatement Agreement, or the
Amendment, among our Company, the Canadian Borrowers (as defined therein), the subsidiary
guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as collateral agent
and administrative agent and the other agents party thereto, which amended the ABL Facility. The
Amendment, among other things, reduced the interest rate applicable to loans made under the ABL
Facility and amended certain covenants thereunder applicable to our Company and our subsidiaries.
In addition, the Amendment extended the maturity date of loans under the ABL Facility from December
3, 2013 to May 13, 2016; provided that if the Credit and Guaranty Agreement, dated as of December
3, 2009 among EB Sports Corp., as borrower, RBG Holdings Corp., as guarantor, Wachovia Bank, N.A.,
as administrative agent and collateral agent and the lenders from time to time party thereto has
not been repaid or refinanced prior to July 1, 2015 with a new credit agreement that meets certain
criteria set forth in the ABL Facility, the loans under the ABL Facility will mature on July 1,
2015.
The interest rates per annum applicable to the loans under the ABL Facility, other than
swingline loans and protective advances, equal an applicable margin percentage plus, at our option,
(1) in the case of U.S. dollar denominated loans, a U.S. base rate or LIBOR, and (2) in the case of
Canadian dollar denominated loans, a Canadian base rate or CDOR. Swingline loans and protective
advances bear interest at the U.S. base rate for U.S. dollar denominated loans and the Canadian
base rate for Canadian dollar denominated loans, in each case, plus an applicable margin (and plus
an additional 2.0% in the case of protective advances). The applicable margin percentage for the
ABL Facility, as amended by the Amendment, ranges between 1.5% and 2.5% for LIBOR or CDOR and 0.5%
and 1.5% for the base rate, based upon our total leverage ratio as calculated under the ABL
Facility. In addition to paying interest on outstanding principal under the ABL Facility, we are
required to pay a commitment fee, in relation to the unutilized commitments, which ranges from
0.375% to 0.5% based upon our utilization of the ABL Facility (increasing when utilization is lower
and decreasing when utilization is higher). We are also required to pay customary letter of credit
fees.
9
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
The ABL Facility requires that if excess gross availability is less than the greater of a
specified percentage of the gross borrowing base and a specified dollar amount, we must comply with
a minimum fixed charge coverage ratio test. In addition, the ABL Facility includes negative
covenants that, subject to significant exceptions, limit our ability and the ability of our
subsidiaries, to, among other things (1) incur additional debt, (2) create liens, (3) transfer all
or substantially all of our assets or enter into merger or consolidation transactions, (4) change
our business, (5) make investments, loans, advances, guarantees and acquisitions, (6) transfer or
sell assets, (7) enter into sale and leaseback transactions, (8) enter into swap agreements, (9)
enter into transactions with affiliates and (10) enter into agreements that restrict dividends from
subsidiaries.
In connection with the Amendment, $120 of debt issuance costs that were associated with a
former syndicate member that did not participate in the Amendment were written-off. We also
incurred bank fees and other costs of $1,282, which have been recorded as debt issuance costs. We
amortized $657 and $751 of debt issuance costs during the third fiscal quarters of 2011 and 2010,
respectively. For the first three fiscal quarters of 2011 and 2010, we amortized $2,113 and $2,255
of debt issuance costs, respectively, which is included in Interest expense, net.
Other
Our Company has arrangements with various banks to issue standby letters of credit or similar
instruments, which guarantee our obligations for the purchase of certain inventories and for
potential claims exposure for insurance coverage. At October 1, 2011 and January 1, 2011,
outstanding letters of credit issued under the revolving credit facilities both totaled $3,306. The
amount of unused lines of credit at October 1, 2011 and January 1, 2011, were $174,708 and
$162,902, respectively.
Cash payments for interest were $1,146 and $5,546 for the fiscal quarters ended October 1,
2011 and October 2, 2010, respectively. For the first three fiscal quarters of 2011 and 2010, cash
payments for interest were $22,500 and $23,536, respectively.
4. Accrued Expenses
Accrued expenses consist of the following:
October 1, 2011 | January 1, 2011 | |||||||
Salaries, wages, commissions and bonuses |
$ | 15,159 | $ | 14,675 | ||||
Advertising |
5,610 | 5,410 | ||||||
Rebates |
7,204 | 6,044 | ||||||
Warranty |
2,237 | 2,434 | ||||||
Product liability current portion |
4,744 | 4,491 | ||||||
Royalties |
1,134 | 1,830 | ||||||
Interest |
11,790 | 3,689 | ||||||
Income taxes |
4,068 | 1,192 | ||||||
Other |
19,808 | 18,687 | ||||||
Total accrued expenses |
$ | 71,754 | $ | 58,452 | ||||
5. Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or
market and include material, labor and factory overhead.
Inventories consisted of the following:
October 1, 2011 | January 1, 2011 | |||||||
Raw materials |
$ | 19,177 | $ | 19,310 | ||||
Work-in-process |
3,483 | 2,364 | ||||||
Finished goods |
122,751 | 119,419 | ||||||
Inventories, net |
$ | 145,411 | $ | 141,093 | ||||
10
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
6. Recent Accounting Pronouncements
In June 2011, the FASB issued a new standard which revises the manner in which entities
present comprehensive income in their financial statements. The new standard removes the
presentation options and requires entities to report components of other comprehensive income in
either (1) a continuous statement of comprehensive income or (2) two separate but consecutive
statements. The new standard does not change the items that must be reported in other comprehensive
income and will be effective for fiscal years and interim periods within those years that begin
after December 15, 2011. The adoption of the new standard will not have a material impact on our
Companys consolidated financial statements as we currently show comprehensive income as a
continuous statement with our Statement of Income.
In September 2011, the FASB issued an amendment to simplify how an entity is required to test
goodwill for impairment. Under this amendment, an entity has the option to first assess qualitative
factors to determine whether it is more likely than not, that the fair value of a reporting unit is
less than its carrying amount. If, after assessing the totality of events or circumstances, an
entity determines it is more likely than not, that the fair value of a reporting unit is less than
its carrying amount, then performing the two-step quantitative impairment test is necessary;
otherwise no further testing is necessary. The amendment is effective for annual and interim
goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The
adoption of these amendments will not have a material impact on our Companys consolidated
financial statements.
11
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
7. Segment Reporting
Our Company has two reportable segments: Team Sports and Action Sports. Our Team Sports
segment primarily consists of football, baseball, softball, ice hockey, lacrosse and other team
sports products and reconditioning services related to certain of these products. Our Action Sports
segment consists primarily of helmets, equipment, components and accessories for cycling,
snowsports and powersports and fitness related products. Our Company evaluates segment performance
primarily based on income from operations excluding equity compensation expense, management
expenses, restructuring and other infrequent expenses, amortization of intangibles and corporate
expenses. Our selling, general and administrative expenses, excluding corporate expenses, are
charged to each segment based on where the expenses are incurred. Segment income from operations as
presented by our Company may not be comparable to similarly titled measures used by other
companies. As a result, the components of income from operations for one segment may not be
comparable to another segment.
Segment results for the fiscal quarter and three fiscal quarters ended October 1, 2011 and
October 2, 2010, respectively, are as follows:
Team | Action | |||||||||||
Fiscal Quarter Ended | Sports | Sports | Consolidated | |||||||||
October 1, 2011 |
||||||||||||
Net sales |
$ | 116,675 | $ | 95,792 | $ | 212,467 | ||||||
Income from operations |
16,782 | 14,412 | 31,194 | |||||||||
Depreciation |
2,914 | 2,086 | 5,000 | |||||||||
Capital expenditures |
3,429 | 4,274 | 7,703 | |||||||||
October 2, 2010 |
||||||||||||
Net sales |
$ | 102,515 | $ | 96,319 | $ | 198,834 | ||||||
Income from operations |
13,027 | 17,009 | 30,036 | |||||||||
Depreciation |
2,698 | 2,043 | 4,741 | |||||||||
Capital expenditures |
1,958 | 2,551 | 4,509 |
Team | Action | |||||||||||
Three Fiscal Quarters Ended | Sports | Sports | Consolidated | |||||||||
October 1, 2011 |
||||||||||||
Net sales |
$ | 352,458 | $ | 275,320 | $ | 627,778 | ||||||
Income from operations |
38,849 | 41,506 | 80,355 | |||||||||
Depreciation |
8,414 | 5,752 | 14,166 | |||||||||
Capital expenditures |
9,426 | 7,708 | 17,134 | |||||||||
October 2, 2010 |
||||||||||||
Net sales |
$ | 331,114 | $ | 264,581 | $ | 595,695 | ||||||
Income from operations |
49,633 | 35,796 | 85,429 | |||||||||
Depreciation |
7,294 | 5,334 | 12,628 | |||||||||
Capital expenditures |
6,657 | 7,746 | 14,403 |
Team | Action | |||||||||||
Sports | Sports | Consolidated | ||||||||||
Assets |
||||||||||||
As of October 1, 2011 |
$ | 616,427 | $ | 359,931 | $ | 976,358 | ||||||
As of January 1, 2011 |
599,980 | 364,574 | 964,554 |
12
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
A reconciliation from the segment information to the Consolidated Statements of Operations and
Comprehensive Income is set forth below:
Fiscal Quarter Ended | Three Fiscal Quarters Ended | |||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | |||||||||||||
Segment income from operations |
$ | 31,194 | $ | 30,036 | $ | 80,355 | $ | 85,429 | ||||||||
Equity compensation expense |
(1,226 | ) | (755 | ) | (2,587 | ) | (2,656 | ) | ||||||||
Corporate expenses |
(8,603 | ) | (8,707 | ) | (23,808 | ) | (23,783 | ) | ||||||||
Amortization of intangibles |
(2,339 | ) | (2,589 | ) | (7,240 | ) | (9,175 | ) | ||||||||
Consolidated income from operations |
$ | 19,026 | $ | 17,985 | $ | 46,720 | $ | 49,815 | ||||||||
8. Product Liability, Litigation and Other Contingencies
Product Liability
Our Company is subject to various product liability claims and/or suits brought against us for
claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths
relate to the use by claimants of products manufactured by our Company and, in certain cases,
products manufactured by others. The ultimate outcome of these claims, or potential future claims,
cannot be determined. Our management obtains an actuarial analysis and has established an accrual
for probable losses based on this analysis, which considers, among other factors, our previous
claims history and available information on alleged claims. However, due to the uncertainty
involved with estimates, actual results could vary substantially from those estimates.
In the opinion of management, amounts accrued for exposures relating to product liability
claims and other legal proceedings are adequate and, accordingly, the ultimate resolution of these
matters is not expected to have a material adverse effect on our Companys consolidated financial
statements. As of October 1, 2011, our Company had no known probable but inestimable exposures
relating to product liability or other legal proceedings that are expected to have a material
adverse effect on our Company. There are four complaints for
damages filed against the National Football League and certain of our entities by groups of retired
NFL players. Three of these suits are now pending in the Federal District Court in Los Angeles, and
the fourth is filed in the Los Angeles Superior Court. We believe these
complaints are without merit and we are vigorously defending against them. These cases are at
preliminary stages, and we are unable to predict outcomes, or reasonably estimate a range of
possible losses, if any. There can be no assurance, however, that unanticipated events will not
require our Company to increase the amount it has accrued for any matter or accrue for a matter
that has not been previously accrued because it was not considered probable.
Our Company maintains product liability insurance coverage under various policies. These
policies provide coverage against claims resulting from alleged injuries sustained during the
respective policy periods, subject to policy terms and conditions. The primary portion of our
Companys product liability coverage is written under a policy expiring in January 2013 with a
$2,000 limit per occurrence excess of a $1,000, $50 and $500 self-insured retention for helmets,
soft goods and all other products, respectively. Our Companys first layer excess policy is written
under a liability policy with a limit of $25,000 excess of $3,000 expiring in January 2012. We also
carry a second layer excess liability policy providing an additional limit of $15,000 excess of
$28,000 expiring January 2012, for a total limit of $43,000.
Litigation and Other Contingencies
Our Company is also involved in various non-product liability claims and actions,
including employment related matters as well as claims relating to potential infringement of
intellectual property rights of others. In 2002, one of our competitors sued us in Canadian Federal
Court alleging infringement of a hockey skate patent. In 2010, we received an unfavorable judgment
on the issue of liability in this suit. Liability and damages are bifurcated proceedings in Canada,
and we are now beginning the damages phase of this proceeding. It is
not possible to accurately estimate any potential resulting monetary
liability at this time because the documents necessary to
establish an accurate assessment of any potential liability have not been disclosed to us. However, our management believes that this claim will not be material to our business or financial
condition.
13
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
9. Income Taxes
Our Company recorded income tax expense of $6,430 and $7,935 for the first three fiscal
quarters ended October 1, 2011, and October 2, 2010, respectively. Our Companys effective tax rate
was 46.0% for the first three fiscal quarters of 2011, as compared to 49.6% for the first three
fiscal quarters of 2010. For the first three fiscal quarters of 2011 and 2010, the difference
between the effective rate and the statutory rate is primarily attributable to the permanent
difference for equity compensation expense and state income taxes.
10. Derivative Instruments and Hedging Activity
Our Company accounts for all derivatives on the balance sheet as an asset or liability
measured at fair value and changes in fair values are recognized in earnings unless specific hedge
accounting criteria are met for cash flow or net investment hedges. If such hedge accounting
criteria are met, the change is deferred in stockholders equity as a component of accumulated
other comprehensive income. The deferred items are recognized in the period the derivative contract
is settled. As of October 1, 2011, we had not designated any of our derivative instruments as
hedges, and therefore, have recorded the changes in fair value in the Consolidated Statements of
Operations and Comprehensive Income.
In 2008, our Company entered an interest rate swap agreement with Wachovia Bank, N.A. The
interest rate swap had an initial fixed USD LIBOR of 2.921%, and was subsequently revised to a
fixed USD LIBOR of 2.811% for the period commencing October 15, 2008, through April 14, 2010 and
thereafter a fixed USD LIBOR of 2.921% until the expiration of the agreement on April 15, 2011. The
swap agreement was not designated as a hedge, and therefore, was recorded at fair value at each
balance sheet date, with the resulting changes in fair value charged or credited to interest
expense in the accompanying Consolidated Statements of Operations and Comprehensive Income each
period.
Our Company uses a fair value hierarchy that prioritizes observable and unobservable inputs
used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. |
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. |
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. |
In determining fair value, our Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible, as well as
considers counterparty credit risk in its assessment of fair value.
The swap fair value was determined through the use of a model that considers various
assumptions, including time value, yield curves, as well as other relevant economic measures, which
are inputs that are classified as Level 2 from a third party bank. As the interest swap expired on
April 15, 2011, the fair value of the swap was zero at October 1, 2011 and a liability of $453 at
January 1, 2011, and was recorded in the current portion of other liabilities in the accompanying
Consolidated Balance Sheets with the corresponding charge to interest expense. During the first
three fiscal quarters of 2011, interest expense reflected $796 related to the swap and a credit of
$453 related to the change in the fair value of the swap.
14
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
Our Company has foreign currency exchange forward contracts in place to reduce our risk
related to inventory purchases and foreign currency based accounts receivable. These contracts are
not designated as hedges, and therefore, under current accounting standards are recorded at fair
value at each balance sheet date, with the resulting change charged or credited to selling, general
and administrative expenses in the accompanying Consolidated Statements of Operations and
Comprehensive Income.
The foreign currency exchange contracts in aggregated notional amounts in place to exchange
United States Dollars at October 1, 2011 and January 1, 2011 were as follows:
October 1, 2011 | January 1, 2011 | |||||||||||||||
Foreign | Foreign | |||||||||||||||
U.S. Dollars | Currency | U.S. Dollars | Currency | |||||||||||||
Foreign Currency Exchange Forward
Contracts: |
||||||||||||||||
U.S. Dollars / Canadian Dollars |
$ | 550 | Cdn $571 | $ | 4,500 | Cdn $4,476 |
As of October 1, 2011 and January 1, 2011, the fair value of the foreign currency exchange
forward contracts, using Level 2 inputs from a third party bank, represented an asset of $13 and a
liability of $93, respectively. Changes in the fair value of the foreign currency exchange
contracts are reflected in selling, general and administrative expenses each period.
The assets and liabilities measured at fair value on a recurring basis, subject to the
disclosure requirements of ASC 820 at October 1, 2011, were as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||
Quoted | ||||||||||||
Prices in | ||||||||||||
Active | Significant | |||||||||||
Markets for | Other | Significant | ||||||||||
Identical | Observable | Unobservable | ||||||||||
Assets | Inputs | Inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets: |
||||||||||||
Foreign currency exchange forward contracts |
$ | | $ | 13 | $ | | ||||||
Liabilities: |
||||||||||||
None |
$ | | $ | | $ | | ||||||
Fair Value of Financial Instruments
The carrying amounts reported in our Companys Consolidated Balance Sheets for Cash and cash
equivalents, Accounts receivable, net and Accounts payable approximates fair value because of
the immediate or short-term maturity of these financial instruments. The fair value amount of
long-term debt under our Companys 9.75% Notes are based on quoted market prices for the same or
similar issues on borrowing rates available to our Company for loans with similar terms and average
maturities.
The estimated fair values of our Companys long-term debt including accrued interest were as
follows:
October 1, 2011 | January 1, 2011 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial liability: |
||||||||||||||||
9.75% Senior Secured Notes |
$ | 358,200 | $ | 377,409 | $ | 349,201 | $ | 387,158 |
15
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
11. Equity-Based Employee Compensation
On March 16, 2006, our Parent adopted the 2006 Equity Incentive Plan, or the Incentive Plan.
Our Parent amended the Incentive Plan in December 2009 to allow for certain new grants. The
Incentive Plan provides for the issuance of Class B Common Units of our Parent, or Units, which are
intended to be profits interests. Such Units qualify as equity instruments of our Parent. The
holders of these Units are entitled to share in the distribution of profits above a certain
threshold, or the distribution threshold. For any particular such Unit, the distribution threshold
is the fair value of a Class A Common Unit of our Parent on the date of grant. Our Parent has made
grants of these Units pursuant to the Incentive Plan since its adoption. Generally, so long as the
Unit holder is employed or remains a member of the board of managers of our Parent, these Units
vest over time (generally a four-year period) or upon achievement of certain company performance
goals. Subject to certain conditions, Units are also eligible to vest in the event of an initial
public offering or change of control. In December 2009, our Parent issued new Class B Common Units
and amended certain existing Class B Common Units, which, in each case, are eligible, subject to
certain conditions, for additional distributions from our Parent in the event that certain company
performance goals are met through 2012. In addition, in December 2009, our Parent agreed to amend
and restate certain existing Class B Common Units to revise the distribution threshold of such
Units to an amount commensurate with the then fair market value of a Class A Common Unit. As of
October 1, 2011, there were 110,152,750.854 Units authorized for grant pursuant to the Incentive
Plan.
Our Company uses the Black-Scholes Option Pricing Model to determine the fair value of the
Units granted, similar to an equity Stock Appreciation Right or SAR. This model uses the simplified
method and such factors as the market price of the underlying Units at date of issuance. For grants
issued during the third fiscal quarter of 2011, an exercise price of $1.32 was used. The weighted
average grant date fair value of Units granted during the third fiscal quarter of 2011 amounted to
$0.22.
During the fiscal quarter ended October 1, 2011, the following assumptions were used in the
Black-Scholes Option Pricing Model to value the Units:
Fiscal Quarter Ended | ||||
October 1, 2011 | ||||
Expected term |
2 years | |||
Dividend yield |
0.0 | % | ||
Forfeiture rate |
7.7 | % | ||
Risk-free interest rate |
0.06 | % | ||
Expected volatility(1) |
50.0 | % |
(1) | Expected volatility is based upon a peer group of companies given no historical data for the Units. |
Our Company records compensation expense using the fair value of the Units granted with time
vesting over the vesting service period on a straight-line basis. Compensation expense for the
performance based vesting Units is recognized when it becomes probable that the performance
conditions will be met. As of October 1, 2011, we have not recognized any compensation expense for
the performance based vesting Units as it is not probable that the performance conditions will be
met.
Our Company recognized compensation expense, included in selling, general and administrative
expenses for its Units during the fiscal quarter and first three fiscal quarters of 2011 and 2010
as follows:
Fiscal Quarter Ended | Three Fiscal Quarters Ended | |||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | |||||||||||||
Equity compensation
expense
Consolidated income
from operations |
$ | 1,226 | $ | 755 | $ | 2,587 | $ | 2,656 | ||||||||
16
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
As of October 1, 2011, there was $18,097 of unrecognized compensation costs, net of actual and
estimated forfeitures related to the Units. This was comprised of $3,767 related to time based
vesting Units and $14,330 related to the performance based vesting Units. The unrecognized cost
related to the time based vesting Units is expected to be amortized over a weighted average service
period of approximately 1.5 years. The unrecognized cost related to the performance based vesting
Units will be recognized when it becomes probable that the performance conditions will be met.
Our Companys Unit activity under the Incentive Plan for the first three fiscal quarters of
2011 is as follows:
Weighted Average | ||||||||
Number of | Grant Date | |||||||
Units | Exercise Price | |||||||
Outstanding at January 1, 2011 |
96,169,675 | $ | 1.44 | |||||
Granted |
5,164,254 | $ | 1.32 | |||||
Outstanding at April 3, 2011 |
101,333,929 | $ | 1.43 | |||||
Forfeited |
(4,384,115 | ) | $ | 1.32 | ||||
Outstanding at July 2, 2011 |
96,949,814 | $ | 1.44 | |||||
Granted |
5,289,336 | $ | 1.32 | |||||
Forfeited |
(72,599 | ) | $ | 2.14 | ||||
Outstanding at October 1, 2011 |
102,166,551 | $ | 1.43 | |||||
Vested Units at October 1, 2011 |
37,759,616 | $ | 1.59 | |||||
12. Warranty Obligations
Our Company records a product warranty expense accrual at the time of sale based on the
Companys historical experience related to warranty return rates, material usage and service
delivery costs incurred in correcting the product. Should actual product warranty return rates,
replacement product costs or service delivery costs differ from the historical rates, revisions to
the estimated warranty liability would be required.
The following is a reconciliation of the changes in our Companys product warranty liability:
2011 | 2010 | |||||||
Beginning of fiscal year |
$ | 2,434 | $ | 3,242 | ||||
Warranty costs incurred during the period |
(2,034 | ) | (1,953 | ) | ||||
Warranty expense recorded during the period |
1,780 | 1,544 | ||||||
End of first fiscal quarter |
2,180 | 2,833 | ||||||
Warranty costs incurred during the period |
(1,257 | ) | (1,201 | ) | ||||
Warranty expense recorded during the period |
974 | 1,133 | ||||||
End of second fiscal quarter |
1,897 | 2,765 | ||||||
Warranty costs incurred during the period |
(837 | ) | (717 | ) | ||||
Warranty expense recorded during the period |
1,177 | 622 | ||||||
End of third fiscal quarter |
$ | 2,237 | $ | 2,670 | ||||
13. Related Party Transactions
Our Company, our Parent and certain of its other subsidiaries entered into management
agreements with Fenway Partners, LLC and Fenway Partners Resources, Inc., each an affiliate of
Fenway Partners Capital Fund II, L.P., in September 2004. Pursuant to these management agreements,
as subsequently amended, Fenway Partners, LLC and Fenway Partners Resources, Inc. provide advisory
services in connection with certain types of transactions and will be entitled to receive a fee
equal to the greater of $1.0 million or 1.5% of the gross value of such transaction, plus
reimbursement of fees and expenses incurred in connection with such transactions. The management
agreements include customary indemnification provisions in favor of these entities and their
affiliates and have initial terms of ten years.
17
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
In connection with the acquisition of Easton in 2006, Easton and various affiliates of James
L. Easton (including Jas. D. Easton, Inc.) entered into various technology license and trademark
license agreements with respect to certain intellectual property owned or licensed by Easton,
including the Easton brand name. Pursuant to these agreements, Easton has granted each of Jas D.
Easton, Inc., James L. Easton Foundation, Easton Development, Inc. and Easton Sports Development
Foundation a name license for use of the Easton name solely as part of their respective company
names. In addition, Easton has granted each of Easton Technical Products, Inc. and Hoyt Archery,
Inc. a license to certain trademarks, including the Easton brand solely in connection with specific
products or services, none of which are currently competitive with our Companys products or
services. Easton has also granted each of these entities a license to certain technology solely in
connection with specific products and fields. Easton has also entered into a patent license
agreement with Easton Technical Products, Inc., which grants it a license to exploit the inventions
disclosed in the patent solely within specific fields. Lastly, Easton entered into a trademark
license agreement with Easton Technical Products, Inc., which grants Easton a license to use
certain trademarks solely in connection with specific products or services.
Our Company has entered into a right of first offer agreement with Jas. D. Easton, Inc. and
Easton Technical Products, Inc. pursuant to which our Company is to receive the opportunity to
purchase Easton Technical Products, Inc. prior to any third party buyer. The term of the right of
first offer agreement extends until the earliest of (1) March 16, 2016, (2) the date Easton
Technical Products, Inc. no longer uses the name Easton, (3) the effectiveness of any initial
public offering by Easton Technical Products, Inc. and (4) the consummation of any sale of such
company or a controlling interest therein effectuated in accordance with the terms of the right of
first offer agreement.
Affiliates of Jas. D. Easton, Inc. and James L. Easton own certain of the properties currently
leased by Easton. For the third fiscal quarters of 2011 and 2010, rent payments pursuant to such
affiliate leases were $297 and $288, respectively. For the first three fiscal quarters of 2011 and
2010, rent payments pursuant to such affiliate leases were $890 and $864, respectively.
On October 1, 2004, Bell entered into a consulting agreement with Terry Lee, a member of the
board of managers of our Parent and the board of directors of our Company. Pursuant to the terms of
the consulting agreement, Mr. Lee agreed to provide us and our affiliates with certain consulting
services relating to Bell. In exchange for his services, Mr. Lee is entitled to annual compensation
of $100. The term of Mr. Lees consulting agreement is for one year and will automatically extend
for additional one-year terms until our Company elects not to extend the agreement.
Effective August 2008, our Parent has agreed to compensate Richard Wenz, a member of the board
of managers of our Parent and the board of directors of our Company, for his services as Chair of
our Companys Audit Committee. Mr. Wenz is paid an annual compensation of $50 for his services.
14. Supplemental Guarantor Condensed Financial Information
In December 2009, in connection with the Refinancing, we issued $350,000 of 9.750% Senior
Secured Notes due 2016, or the Notes. The indenture governing the Notes contains certain
restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends,
grant liens, sell assets and engage in certain other activities. The Notes are guaranteed by all of
our domestic subsidiaries, or Guarantors. Each subsidiary guarantor is wholly owned and the
guarantees are full and unconditional and joint and several. All other subsidiaries of our Company,
or Non-Guarantors, do not guarantee the Notes.
The following condensed consolidating financial statements present the results of operations,
financial position and cash flows of (1) Issuer, (2) Guarantors, (3) Non-Guarantors and (4)
Eliminations to arrive at the information for our Company on a consolidated basis at October 1,
2011 and for the third fiscal quarter of 2011, the first three fiscal quarters of 2011 and the
respective comparable periods for fiscal 2010. Separate financial statements and other disclosures
concerning the Guarantors are not presented because our management does not believe such
information is material to investors. Therefore, each of the Guarantors is combined in the
presentation below.
18
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Balance Sheet
October 1, 2011
October 1, 2011
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 6,621 | $ | 4,467 | $ | 12,553 | $ | | $ | 23,641 | ||||||||||
Accounts receivable, net |
| 202,370 | 29,563 | | 231,933 | |||||||||||||||
Inventories, net |
| 125,859 | 19,552 | | 145,411 | |||||||||||||||
Prepaid expenses |
1,573 | 1,356 | 909 | | 3,838 | |||||||||||||||
Deferred taxes |
| 15,976 | | | 15,976 | |||||||||||||||
Other current assets |
| 7,126 | 2,173 | | 9,299 | |||||||||||||||
Total current assets |
8,194 | 357,154 | 64,750 | | 430,098 | |||||||||||||||
Property, plant and equipment,
net |
23,185 | 28,649 | 890 | | 52,724 | |||||||||||||||
Deferred financing fees, net |
13,147 | | | | 13,147 | |||||||||||||||
Investments and intercompany
receivables |
372,539 | 33,163 | 108,334 | (514,036 | ) | | ||||||||||||||
Intangible assets, net |
| 266,371 | 5,436 | | 271,807 | |||||||||||||||
Goodwill |
16,195 | 185,542 | 5,191 | | 206,928 | |||||||||||||||
Other assets |
444 | 1,087 | 123 | | 1,654 | |||||||||||||||
Total assets |
$ | 433,704 | $ | 871,966 | $ | 184,724 | $ | (514,036 | ) | $ | 976,358 | |||||||||
LIABILITIES AND STOCKHOLDERS
EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Revolving credit facility |
$ | 36,000 | $ | | $ | | $ | | $ | 36,000 | ||||||||||
Current portion of capital
lease obligations |
| 25 | | | 25 | |||||||||||||||
Accounts payable |
| 62,715 | 3,794 | | 66,509 | |||||||||||||||
Accrued expenses |
18,523 | 47,302 | 5,929 | | 71,754 | |||||||||||||||
Total current liabilities |
54,523 | 110,042 | 9,723 | | 174,288 | |||||||||||||||
Long-term debt, less current
portion |
346,541 | | | | 346,541 | |||||||||||||||
Capital lease obligations, less
current portion |
| 59 | | | 59 | |||||||||||||||
Deferred taxes |
| 52,292 | | | 52,292 | |||||||||||||||
Other noncurrent liabilities |
| 11,083 | 7,433 | | 18,516 | |||||||||||||||
Long-term intercompany payables |
| 379,738 | 97,898 | (477,636 | ) | | ||||||||||||||
Total liabilities |
401,064 | 553,214 | 115,054 | (477,636 | ) | 591,696 | ||||||||||||||
Total stockholders equity |
32,640 | 318,752 | 69,670 | (36,400 | ) | 384,662 | ||||||||||||||
Total liabilities and
stockholders equity |
$ | 433,704 | $ | 871,966 | $ | 184,724 | $ | (514,036 | ) | $ | 976,358 | |||||||||
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Balance Sheet
January 1, 2011
January 1, 2011
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 1,981 | $ | 7,049 | $ | 14,994 | $ | | $ | 24,024 | ||||||||||
Accounts receivable, net |
| 189,750 | 26,416 | | 216,166 | |||||||||||||||
Inventories, net |
| 122,116 | 18,977 | | 141,093 | |||||||||||||||
Prepaid expenses |
1,306 | 4,907 | 867 | | 7,080 | |||||||||||||||
Deferred taxes |
| 16,254 | | | 16,254 | |||||||||||||||
Other current assets |
| 7,504 | 979 | | 8,483 | |||||||||||||||
Total current assets |
3,287 | 347,580 | 62,233 | | 413,100 | |||||||||||||||
Property, plant and equipment,
net |
21,235 | 27,776 | 725 | | 49,736 | |||||||||||||||
Deferred financing fees, net |
14,248 | | | | 14,248 | |||||||||||||||
Investments and intercompany
receivables |
370,712 | 70,614 | 74,634 | (515,960 | ) | | ||||||||||||||
Intangible assets, net |
| 273,466 | 5,581 | | 279,047 | |||||||||||||||
Goodwill |
16,195 | 185,542 | 5,191 | | 206,928 | |||||||||||||||
Other assets |
| 1,355 | 140 | | 1,495 | |||||||||||||||
Total assets |
$ | 425,677 | $ | 906,333 | $ | 148,504 | $ | (515,960 | ) | $ | 964,554 | |||||||||
LIABILITIES AND STOCKHOLDERS
EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Revolving credit facility |
$ | 38,893 | $ | | $ | | $ | | $ | 38,893 | ||||||||||
Current portion of capital
lease obligations |
| 24 | | | 24 | |||||||||||||||
Accounts payable |
| 71,244 | 1,904 | | 73,148 | |||||||||||||||
Accrued expenses |
10,562 | 41,313 | 6,577 | | 58,452 | |||||||||||||||
Total current liabilities |
49,455 | 112,581 | 8,481 | | 170,517 | |||||||||||||||
Long-term debt, less current
portion |
346,168 | | | | 346,168 | |||||||||||||||
Capital lease obligations, less
current portion |
| 78 | | | 78 | |||||||||||||||
Deferred taxes |
| 49,379 | | | 49,379 | |||||||||||||||
Other noncurrent liabilities |
| 13,341 | 7,433 | | 20,774 | |||||||||||||||
Long-term intercompany payables |
| 417,140 | 60,496 | (477,636 | ) | | ||||||||||||||
Total liabilities |
395,623 | 592,519 | 76,410 | (477,636 | ) | 586,916 | ||||||||||||||
Total stockholders equity |
30,054 | 313,814 | 72,094 | (38,324 | ) | 377,638 | ||||||||||||||
Total liabilities and
stockholders equity |
$ | 425,677 | $ | 906,333 | $ | 148,504 | $ | (515,960 | ) | $ | 964,554 | |||||||||
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Statement of Income
Fiscal Quarter Ended October 1, 2011
Fiscal Quarter Ended October 1, 2011
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 199,771 | $ | 23,343 | $ | (10,647 | ) | $ | 212,467 | |||||||||
Cost of sales |
| 127,642 | 19,813 | (10,647 | ) | 136,808 | ||||||||||||||
Gross profit |
| 72,129 | 3,530 | | 75,659 | |||||||||||||||
Selling, general and administrative expenses |
11,214 | 40,289 | 2,791 | | 54,294 | |||||||||||||||
Amortization of intangibles |
| 2,339 | | | 2,339 | |||||||||||||||
(Loss) income from operations |
(11,214 | ) | 29,501 | 739 | | 19,026 | ||||||||||||||
Interest expense, net |
9,980 | 650 | 5 | | 10,635 | |||||||||||||||
Share of net income of subsidiaries under equity method |
25,872 | 734 | | (26,606 | ) | | ||||||||||||||
Income before income taxes |
4,678 | 29,585 | 734 | (26,606 | ) | 8,391 | ||||||||||||||
Income tax expense |
| 3,713 | | | 3,713 | |||||||||||||||
Net income |
$ | 4,678 | $ | 25,872 | $ | 734 | $ | (26,606 | ) | $ | 4,678 | |||||||||
Condensed Consolidating Statement of Income
Fiscal Quarter Ended October 2, 2010
Fiscal Quarter Ended October 2, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 183,848 | $ | 24,019 | $ | (9,033 | ) | $ | 198,834 | |||||||||
Cost of sales |
| 119,694 | 18,584 | (9,033 | ) | 129,245 | ||||||||||||||
Gross profit |
| 64,154 | 5,435 | | 69,589 | |||||||||||||||
Selling, general and administrative expenses |
11,021 | 35,148 | 2,846 | | 49,015 | |||||||||||||||
Amortization of intangibles |
| 2,589 | | | 2,589 | |||||||||||||||
(Loss) income from operations |
(11,021 | ) | 26,417 | 2,589 | | 17,985 | ||||||||||||||
Interest expense, net |
10,774 | 356 | 2 | | 11,132 | |||||||||||||||
Share of net income of subsidiaries under equity method |
24,785 | 2,136 | | (26,921 | ) | | ||||||||||||||
Income before income taxes |
2,990 | 28,197 | 2,587 | (26,921 | ) | 6,853 | ||||||||||||||
Income tax expense |
| 3,412 | 451 | | 3,863 | |||||||||||||||
Net income |
$ | 2,990 | $ | 24,785 | $ | 2,136 | $ | (26,921 | ) | $ | 2,990 | |||||||||
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Statement of Income
Three Fiscal Quarters Ended October 1, 2011
Three Fiscal Quarters Ended October 1, 2011
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 603,741 | $ | 66,962 | $ | (42,925 | ) | $ | 627,778 | |||||||||
Cost of sales |
| 401,723 | 58,339 | (42,925 | ) | 417,137 | ||||||||||||||
Gross profit |
| 202,018 | 8,623 | | 210,641 | |||||||||||||||
Selling, general and administrative expenses |
30,809 | 118,252 | 7,620 | | 156,681 | |||||||||||||||
Amortization of intangibles |
| 7,240 | | | 7,240 | |||||||||||||||
(Loss) income from operations |
(30,809 | ) | 76,526 | 1,003 | | 46,720 | ||||||||||||||
Interest expense, net |
31,101 | 1,617 | 10 | | 32,728 | |||||||||||||||
Share of net income of subsidiaries under equity method |
69,472 | 915 | | (70,387 | ) | | ||||||||||||||
Income before income taxes |
7,562 | 75,824 | 993 | (70,387 | ) | 13,992 | ||||||||||||||
Income tax expense |
| 6,352 | 78 | | 6,430 | |||||||||||||||
Net income |
$ | 7,562 | $ | 69,472 | $ | 915 | $ | (70,387 | ) | $ | 7,562 | |||||||||
Condensed Consolidating Statement of Income
Three Fiscal Quarters Ended October 2, 2010
Three Fiscal Quarters Ended October 2, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 551,701 | $ | 70,429 | $ | (26,435 | ) | $ | 595,695 | |||||||||
Cost of sales |
| 363,802 | 55,036 | (26,435 | ) | 392,403 | ||||||||||||||
Gross profit |
| 187,899 | 15,393 | | 203,292 | |||||||||||||||
Selling, general and administrative expenses |
30,742 | 106,632 | 6,928 | | 144,302 | |||||||||||||||
Amortization of intangibles |
| 9,175 | | | 9,175 | |||||||||||||||
(Loss) income from operations |
(30,742 | ) | 72,092 | 8,465 | | 49,815 | ||||||||||||||
Interest expense, net |
32,945 | 863 | (1 | ) | | 33,807 | ||||||||||||||
Share of net income of subsidiaries under equity method |
71,760 | 6,219 | | (77,979 | ) | | ||||||||||||||
Income before income taxes |
8,073 | 77,448 | 8,466 | (77,979 | ) | 16,008 | ||||||||||||||
Income tax expense |
| 5,688 | 2,247 | | 7,935 | |||||||||||||||
Net income |
$ | 8,073 | $ | 71,760 | $ | 6,219 | $ | (77,979 | ) | $ | 8,073 | |||||||||
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Statement of Cash Flows
Three Fiscal Quarters Ended October 1, 2011
Three Fiscal Quarters Ended October 1, 2011
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 7,562 | $ | 69,472 | $ | 915 | $ | (70,387 | ) | $ | 7,562 | |||||||||
Non-cash adjustments |
3,458 | (47,897 | ) | 3,872 | 70,387 | 29,820 | ||||||||||||||
Changes in operating assets and liabilities |
7,250 | (16,964 | ) | (5,197 | ) | | (14,911 | ) | ||||||||||||
Net cash provided by (used in)
operating activities |
18,270 | 4,611 | (410 | ) | | 22,471 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of property, plant and equipment |
(9,604 | ) | (7,175 | ) | (355 | ) | | (17,134 | ) | |||||||||||
Net cash used in investing activities |
(9,604 | ) | (7,175 | ) | (355 | ) | | (17,134 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Payments on capital lease obligations |
| (18 | ) | | | (18 | ) | |||||||||||||
Payments on revolving credit facility, net |
(2,893 | ) | | | | (2,893 | ) | |||||||||||||
Payment of debt issuance costs |
(1,133 | ) | | | | (1,133 | ) | |||||||||||||
Net cash used in financing activities |
(4,026 | ) | (18 | ) | | | (4,044 | ) | ||||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | (1,676 | ) | | (1,676 | ) | |||||||||||||
Increase (decrease) in cash and cash equivalents |
4,640 | (2,582 | ) | (2,441 | ) | | (383 | ) | ||||||||||||
Cash and cash equivalents, beginning of period |
1,981 | 7,049 | 14,994 | | 24,024 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 6,621 | $ | 4,467 | $ | 12,553 | $ | | $ | 23,641 | ||||||||||
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited and amounts in thousands, except as specified)
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Statement of Cash Flows
Three Fiscal Quarters Ended October 2, 2010
Three Fiscal Quarters Ended October 2, 2010
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 8,073 | $ | 71,760 | $ | 6,219 | $ | (77,979 | ) | $ | 8,073 | |||||||||
Non-cash adjustments |
21,707 | (72,311 | ) | 3,175 | 77,979 | 30,550 | ||||||||||||||
Changes in operating assets and liabilities,
net of effects from purchase of businesses |
14,575 | 8,394 | (13,767 | ) | | 9,202 | ||||||||||||||
Net cash provided by (used in) operating
activities |
44,355 | 7,843 | (4,373 | ) | | 47,825 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of property, plant and equipment |
(7,069 | ) | (7,131 | ) | (203 | ) | | (14,403 | ) | |||||||||||
Purchases of businesses, net of cash acquired |
| (1,750 | ) | | | (1,750 | ) | |||||||||||||
Net cash used in investing activities |
(7,069 | ) | (8,881 | ) | (203 | ) | | (16,153 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Payments on capital lease obligations |
| (17 | ) | | | (17 | ) | |||||||||||||
Payments on revolving credit facility, net |
(38,000 | ) | | | | (38,000 | ) | |||||||||||||
Net cash used in financing activities |
(38,000 | ) | (17 | ) | | | (38,017 | ) | ||||||||||||
Effect of exchange rate changes on cash and
cash equivalents |
| | (413 | ) | | (413 | ) | |||||||||||||
Decrease in cash and cash equivalents |
(714 | ) | (1,055 | ) | (4,989 | ) | | (6,758 | ) | |||||||||||
Cash and cash equivalents, beginning of period |
9,347 | 10,229 | 13,742 | | 33,318 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 8,633 | $ | 9,174 | $ | 8,753 | $ | | $ | 26,560 | ||||||||||
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with our consolidated financial
statements and the related notes, included elsewhere in this Form 10-Q.
Unless otherwise indicated, all references in this Form 10-Q to Easton-Bell, we, us, our, and
the Company refer to Easton-Bell Sports, Inc. and its consolidated subsidiaries. References to
Easton, Bell and Riddell refer to Easton Sports, Inc. and its consolidated subsidiaries, Bell
Sports Corp. and its consolidated subsidiaries and Riddell Sports Group, Inc. and its consolidated
subsidiaries, respectively. Easton-Bell Sports, Inc. is a wholly-owned subsidiary of RBG Holdings
Corp., or RBG, which, in turn, is a wholly-owned subsidiary of EB Sports Corp., or EB Sports, of
which 100% of the issued and outstanding voting common stock is owned by Easton-Bell Sports, LLC,
the ultimate parent company, or our Parent.
FORWARD-LOOKING STATEMENTS AND INFORMATION
This quarterly report includes forward-looking statements. All statements other than
statements of historical fact included in this report that address activities, events or
developments that we expect, believe or anticipate will or may occur in the future are
forward-looking statements. Forward-looking statements give our current expectations and
projections relating to our financial condition, results of operations, plans, objectives, future
performance and business. These statements can be identified by the fact that they do not relate
strictly to historical or current facts. Forward-looking statements may include words such as
anticipate, estimate, expect, project, intend, plan, believe and other words and
terms of similar meaning in connection with any discussion of the timing or nature of future
operating or financial performance or other events. Although we believe that the expectations
reflected in our forward-looking statements are reasonable, we do not know whether our expectations
will prove correct. The factors mentioned in our discussion in this quarterly report, as well as
the risks outlined under Risk Factors in our 2010 Annual Report on Form 10-K, will be important
in determining future results.
These forward-looking statements are expressed in good faith and we believe there is a
reasonable basis for them. However, there can be no assurance that the events, results or trends
identified in these forward-looking statements will occur or be achieved. Investors should not
place undue reliance on any of our forward-looking statements because they are subject to a variety
of risks, uncertainties, and other factors that could cause actual results to differ materially
from our expectations. Furthermore, any forward-looking statement speaks only as of the date on
which it is made and except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which it is made or
to reflect the occurrence of anticipated or unanticipated events or circumstances.
OVERVIEW
We are a leading designer, developer and marketer of branded sports equipment, protective
products and related accessories. We offer products that are used in baseball, softball, ice
hockey, football, lacrosse and other team sports, and in various action sports, including cycling,
snowsports, powersports and skateboarding. Sports enthusiasts at all levels, from recreational
participants to professional athletes, choose our products for their innovative designs and
advanced materials, which provide a performance or protective advantage. Throughout our history,
our focus on research and development has enabled us to introduce attractive and innovative
products, many of which have set new standards for performance in their respective sports. As a
result, we are able to consistently enter new product categories and expand and improve our
existing product lines.
We currently sell a broad range of products primarily under four well-known
brandsEaston® (baseball, softball, ice hockey and lacrosse equipment, apparel and
cycling components), Bell® (cycling and action sports helmets and accessories),
Giro® (cycling and snowsports helmets and accessories) and Riddell® (football
equipment and reconditioning services). Together, these brands represent the vast majority of our
revenues. We believe that our brands are among the most recognized in the sporting goods industry
as demonstrated by our leading market share in many of our core categories.
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Table of Contents
We sell our products through diverse channels of distribution including: (1) specialty
retailers that cater to sports enthusiasts who typically seek premium products at the highest
performance levels, (2) national and regional full-line sporting goods retailers and distributors,
(3) institutional buyers such as educational institutions and athletic leagues and (4) mass
retailers that offer a focused selection of products at entry-level and mid-level price points. As
a function of our flexible, low fixed-cost production model, we are able to leverage the expertise
of our vendor partners in order to reduce the overhead and capital intensity generally associated
with manufacturing.
We have two reportable segments: Team Sports and Action Sports. Our Team Sports segment
primarily consists of football, baseball, softball, ice hockey, lacrosse and other team sports
products and reconditioning services related to certain of these products. Our Action Sports
segment primarily consists of helmets, equipment, components and accessories for cycling,
snowsports and powersports and fitness related products.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and
financial measures. The key measures for determining how our business is performing are net sales
growth by segment, gross profit margin and selling, general and administrative expenses.
Net Sales
Net sales reflect our revenues from the sale of our products and services less returns,
discounts and allowances. It also includes licensing income that we collect. Substantially all of
Eastons activity and all of Riddells activity is reflected in our Team Sports segment, which
primarily consists of football, baseball, softball, ice hockey, lacrosse and other team sports
products and reconditioning services related to certain of these products. All of Bells activity,
including the Bell brand and the Giro brand and the Easton branded cycling products are reflected
in our Action Sports segment, which primarily consists of helmets, equipment, components and
accessories for cycling, snowsports and powersports and fitness related products.
Cost of Sales
Cost of sales includes the direct cost of purchased merchandise, inbound freight, factory
operating costs (including depreciation), warranty costs, distribution and shipping expenses,
including outbound freight. Cost of sales generally changes as we incur higher or lower costs from
our vendors, experience better or worse productivity in our factories and increase or decrease
inventory levels as certain fixed overhead is included in inventory. A shift in the composition of
our net sales can also result in higher or lower cost of sales as our gross profit margins differ
by product. We review our inventory levels on an ongoing basis to identify slow-moving materials
and products and generally reserve for excess and obsolete inventory. If we misjudge the market for
our products, we may be faced with significant excess inventory and need to allow for higher
charges for excess and obsolete inventory. Such charges have reduced our gross profit in some prior
periods and may have a material adverse impact depending on the amount of the charge.
Gross Profit
Gross profit is equal to our net sales minus our cost of sales. Gross profit margin measures
gross profit as a percentage of our net sales. We state inventories at the lower of cost
(determined on a first-in, first-out basis) or market and include material, labor and factory
overhead costs. Our gross profit may not be fully comparable to other sporting goods companies, as
we include costs related to distribution and freight in cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses include all operating expenses not
included in cost of sales, primarily, selling, marketing, administrative payroll, research and
development, legal, product liability, insurance and non-manufacturing lease expense, as well as
certain depreciation and amortization. Other than selling expenses, these expenses generally do not
vary proportionally with net sales. As a result, SG&A expenses as a percentage of net sales are
usually higher in the winter season than the summer season due to the seasonality of net sales.
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Factors Affecting our Business
Outlook
Although other factors will likely impact us, including some we do not foresee, we believe our
performance for 2011 may be affected by the following:
| Economic Climate. The uncertain worldwide economic environment could cause the reported financial information not to be indicative of future operating results or of future financial condition. The current economic environment continues to affect our business in a number of direct and indirect ways including: reduced consumer demand for our products; tighter inventory management by retailers; reduced profit margins due to pricing pressures and an unfavorable sales mix due to a higher concentration of sales of mid to lower price point products; changes in currency exchange rates; lack of credit availability, particularly for specialty retailers; inflation; and business disruptions due to difficulties experienced by suppliers and customers. |
| Retail Market Conditions. As a result of the slowing worldwide economic conditions, the retail market for sports equipment has slowed and is extremely competitive, with strong pressure from retailers for lower prices. We have experienced the effect of consumers trading down price points and delaying certain discretionary purchases, which has resulted in retailers reluctance to place orders for inventory in advance of selling seasons. Further, institutional customers have reduced or deferred purchases due to budget constraints. These trends may continue to have a negative impact on our businesses. We continue to address the retail environment through our focus on innovation and product development and emphasis on multiple price points. |
| Operations and Manufacturing. We intend to continue to streamline distribution, logistics and manufacturing operations, bring uniform methodologies to inventory management, optimize transportation, improve manufacturing efficiencies and provide a high level of service to our customers. Over a several year period we have transitioned production of certain products from our facilities to third party vendors in Asia and other cost efficient sources of labor. However, as a result of our transition of the production of products from our own facilities to third party suppliers, we may become more vulnerable to higher levels of product defects, as well as increased sourced product costs, and our ability to mitigate such cost increases may be reduced. |
| Interest Expense and Debt Repayment. In 2009, in connection with the refinancing of our Companys then-existing indebtedness, or the Refinancing, we entered into a $250.0 million senior secured asset-based revolving credit facility, subject to availability under each of a United States and Canadian borrowing base, which amount, subject to certain conditions, may be increased to allow borrowings of up to $300.0 million, together with certain of our subsidiaries as Canadian Borrowers (as defined therein) or Subsidiary Guarantors (as defined therein), with the lenders party thereto, or the ABL Facility. As of October 1, 2011, the outstanding principal balance under the ABL Facility was $36.0 million. In addition, we have $350.0 million of outstanding principal amount of our Senior Secured Notes due December 2016, or the Notes. Because our existing indebtedness requires that we use a substantial portion of our cash flows to service interest payments, the amount of available cash flows we will have for working capital, capital expenditures, acquisitions and other general corporate purposes could be limited. |
| Seasonality. Our business is subject to seasonal fluctuation. Sales of cycling products and accessories occur primarily during the warm weather months. Sales of baseball and softball products occur primarily in the late winter and early spring months in preparation for the spring baseball and softball season. Sales of football equipment and reconditioning services are driven primarily by football buying patterns, where orders begin at the end of the school football season (December) and run through to the start of the next season (August). Shipments of football products and performance of reconditioning services reach a low point during the football season. Sales of ice hockey equipment are driven by ice hockey buying patterns with orders shipping in late spring for fall play. Seasonal impacts are increasingly mitigated by the increase in snowsports and powersports sales which, to a certain extent, counter the cycling, baseball, softball and football seasons. |
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon the consolidated financial statements which have been prepared in accordance with U.S.
generally accepted accounting principles, or GAAP. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, our management evaluates estimates, including those related to reserves,
intangible assets, income taxes and contingencies. These estimates are based on historical
experience and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or
conditions.
Revenue Recognition. Sales of products are recognized when title passes and risks of ownership
have been transferred to our customer, which usually is upon shipment. Title generally passes to
the dealer or distributor upon shipment from our facilities and the risk of loss upon damage, theft
or destruction of the product in transit is the responsibility of the dealer, distributor or third
party carrier. Reconditioning revenue is recognized upon the completion of services. Allowances for
sales returns, discounts and allowances, including volume-based customer incentives are estimated
and recorded concurrent with the recognition of the sale. Royalty income, which is not material, is
recorded when earned based upon contract terms with licensees which provide for royalties.
Accounts Receivable and Allowances. We review the financial condition and creditworthiness of
potential customers prior to contracting for sales and record accounts receivable at their face
value upon completion of the sale to our customers. We record an allowance for doubtful accounts
based upon managements estimate of the amount of uncollectible receivables. This estimate is based
upon prior experience including historic losses as well as current economic conditions. The
estimates can be affected by changes in the retail industry, customer credit issues and customer
bankruptcies. Because we cannot predict future changes in the retail industry and financial
stability of our customers, actual future losses from uncollectible accounts may differ from our
estimates. If the financial condition of our customers were to deteriorate, resulting in their
inability to make payments, a larger allowance might be required. In the event we determine that a
smaller or larger allowance is appropriate, we would record a credit or a charge to selling,
general and administrative expense in the period in which such a determination is made.
Uncollectible receivables are written-off once management has determined that further collection
efforts will not be successful. We generally do not require collateral from our customers.
Inventories. Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market and include material, labor and factory overhead. Provisions for excess and
obsolete inventories are based on managements assessment of slow-moving and obsolete inventory on
a product-by-product basis. We record adjustments to our inventory for estimated obsolescence or a
decrease in market value equal to the difference between the cost of the inventory and the
estimated market value, based on market conditions. These adjustments are estimates, which could
vary significantly, either favorably or unfavorably, from actual experience if future economic
conditions, levels of consumer demand, customer inventory levels or competitive conditions differ
from our expectations.
Long-lived and intangible assets. We follow the current accounting guidance relating to
goodwill and trademarks, which have indefinite lives and are not amortized. The carrying values of
all long-lived assets, excluding goodwill and indefinite lived intangibles, are reviewed for
impairment in accordance with current accounting guidelines whenever events or changes in
circumstances indicate the carrying amount of an asset or group of assets may not be recoverable
(such as a significant decline in sales, earnings or cash flows or material adverse changes in the
business climate). An impairment loss is recognized when the undiscounted future cash flows
estimated to be generated by the asset to be held and used are not sufficient to recover the
unamortized balance of the asset. The impairment review includes a comparison of future cash flows
expected to be generated by the asset or group of assets with their associated carrying value. If
the carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and
without interest charges), an impairment loss would be recognized to the extent that the carrying
value exceeds the fair value. The estimate of future cash flows is based upon, among other things,
certain assumptions about expected future operating performance. These estimates of undiscounted
cash flows may differ from actual cash flows due to, among other things, changes in general
economic conditions, customer requirements and our business model.
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For goodwill, on an annual basis or more frequently if certain conditions exist, the fair
values of our reporting units are compared with their carrying values and an impairment loss is
recognized if the carrying value exceeds fair value to the extent that the carrying value of
goodwill exceeds its fair value. We generally base our measurement of the fair value of a reporting
unit on the present value of future discounted cash flows. The discounted cash flows model
indicates the fair value of each reporting unit based on the present value of the cash flows that
we expect each reporting unit to generate in the future. Our significant estimates in the
discounted cash flows model include our discount rate, long-term rate of growth and profitability
of each reporting unit and working capital effects. The growth and profitability rates are based on
our expectations for the markets in which we operate and cost increases that are reflective of
anticipated inflation (deflation) adjusted for any anticipated future cost savings and our discount
rate is based on our weighted average cost of capital. In our most recent impairment analysis, we
used a weighted average long-term cash flow growth rate of 6.8%, and a discount rate of 10.0%. Our
weighted average long-term growth rate reflects our expectation that our future cash flows will
increase. The fair value of the reporting units could change significantly due to changes in
estimates of future cash flows as a result of changing economic conditions, our business
environment and as a result of changes in the discount rate used.
The Companys goodwill impairment analysis performed as of January 1, 2011 indicated that none
of the reporting units were at risk of failing the goodwill impairment test, and the fair values of
each of the reporting units would have to decline at a minimum in excess of 5% depending on the
specific reporting unit in order for the carrying value of a particular reporting unit to exceed
the fair value. If reductions in estimated undiscounted or discounted cash flows occur in the
future, and such reductions indicate that an impairment loss has occurred, an impairment loss will
be recorded in the period that such a determination is made.
We amortize certain definite-lived acquired intangible assets on a straight-line basis over
estimated useful lives of seven to nineteen years for patents, seven to twenty years for customer
relationships, four to five years for licensing and other agreements and seven years for
finite-lived trademarks and tradenames. Deferred financing costs are being amortized by the
straight-line method over the term of the related debt, which does not vary significantly from an
effective interest method.
Income Taxes. We follow the provisions of Accounting Standards Codification (ASC) Topic 740,
Income Taxes. Deferred tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements or tax returns. Deferred
tax liabilities and assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities (excluding non-deductible goodwill) using enacted tax rates
in effect for the years in which the differences are expected to become recoverable or payable. A
portion of our deferred tax assets relate to net operating loss carryforwards. The realization of
these assets is based upon estimates of future taxable income. Changes in economic conditions and
the business environment and our assumptions regarding realization of deferred tax assets can have
a significant effect on income tax expense.
Product Liability Litigation Matters and Contingencies. We are subject to various product
liability claims and/or suits brought against us for claims involving damages for personal injuries
or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products
manufactured or reconditioned by us or our subsidiaries and, in certain cases, products
manufactured by others. The ultimate outcome of these claims, or potential future claims, cannot
currently be determined. We estimate the uninsured portion of probable future costs and expenses
related to claims, as well as incurred but not reported claims and record an accrual in this amount
on our consolidated balance sheets. These accruals are based on managements best estimate of
probable losses and defense costs anticipated to result from such claims, from within a range of
potential outcomes, based on available information, including an analysis provided by an
independent actuarial services firm, previous claims history and available information on alleged
claims. However, due to the uncertainty involved with estimates, actual results could vary
substantially from these estimates.
Derivative Instruments and Hedging Activity. We enter into foreign currency exchange forward
contracts to reduce our risk related to inventory purchases. These contracts are not designated as
hedges, and therefore, they are recorded at fair value at each balance sheet date, with the
resulting change charged or credited to selling, general and administrative, or SG&A, expenses in
the Consolidated Statements of Operations and Comprehensive Income.
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Warranty Liability. We record a warranty obligation at the time of sale based on our
historical experience. We estimate our warranty obligation by reference to historical product
warranty return rates, material usage and service delivery costs incurred in correcting the
product. Should actual product warranty return rates, material usage or service delivery costs
differ from the historical rates, revisions to the estimated warranty liability would be required.
Equity-Based Compensation. Effective January 1, 2006, we adopted accounting standards which
requires us to expense Class B Common Units of our Parent, or Units, granted under our Parents
Incentive Plan based upon the fair market value of the Units on the date of grant. We are
amortizing the fair market value of Units granted over the vesting period of the Units and we are
using the prospective method of adoption. For Units issued prior to January 1, 2006, we accounted
for these Units using the intrinsic value method in accordance with previous accounting standards.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage relationship to net
sales of certain items included in our Consolidated Statements of Operations and Comprehensive
Income:
Fiscal Quarter Ended | ||||||||||||||||
October 1, | % of | October 2, | % of | |||||||||||||
2011 | Net Sales | 2010 | Net Sales | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net sales |
$ | 212.5 | 100.0 | % | $ | 198.8 | 100.0 | % | ||||||||
Cost of sales |
136.8 | 64.4 | % | 129.2 | 65.0 | % | ||||||||||
Gross profit |
75.7 | 35.6 | % | 69.6 | 35.0 | % | ||||||||||
Selling, general and administrative expenses |
54.3 | 25.6 | % | 49.0 | 24.6 | % | ||||||||||
Amortization of intangibles |
2.4 | 1.1 | % | 2.6 | 1.3 | % | ||||||||||
Income from operations |
$ | 19.0 | 8.9 | % | $ | 18.0 | 9.1 | % | ||||||||
Three Fiscal Quarters Ended | ||||||||||||||||
October 1, | % of | October 2, | % of | |||||||||||||
2011 | Net Sales | 2010 | Net Sales | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net sales |
$ | 627.8 | 100.0 | % | $ | 595.7 | 100.0 | % | ||||||||
Cost of sales |
417.1 | 66.4 | % | 392.4 | 65.9 | % | ||||||||||
Gross profit |
210.7 | 33.6 | % | 203.3 | 34.1 | % | ||||||||||
Selling, general and administrative expenses |
156.7 | 25.0 | % | 144.3 | 24.2 | % | ||||||||||
Amortization of intangibles |
7.3 | 1.2 | % | 9.2 | 1.5 | % | ||||||||||
Income from operations |
$ | 46.7 | 7.4 | % | $ | 49.8 | 8.4 | % | ||||||||
Net Sales
The following table sets forth for the periods indicated, net sales for each of our segments:
Fiscal Quarter Ended | Three Fiscal Quarters Ended | |||||||||||||||||||||||||||||||
October 1, | October 2, | Change | October 1, | October 2, | Change | |||||||||||||||||||||||||||
2011 | 2010 | $ | % | 2011 | 2010 | $ | % | |||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Team Sports |
$ | 116.7 | $ | 102.5 | $ | 14.2 | 13.9 | % | $ | 352.5 | $ | 331.1 | $ | 21.4 | 6.5 | % | ||||||||||||||||
Action Sports |
95.8 | 96.3 | (0.5 | ) | (0.5 | %) | 275.3 | 264.6 | 10.7 | 4.0 | % | |||||||||||||||||||||
$ | 212.5 | $ | 198.8 | $ | 13.7 | 6.9 | % | $ | 627.8 | $ | 595.7 | $ | 32.1 | 5.4 | % | |||||||||||||||||
Net sales in Team Sports and Action Sports during the third quarter of 2011 were positively
impacted by favorable foreign currency exchange rate movements of $0.9 million and $0.5 million,
respectively. On a constant currency basis, net sales in Team Sports increased by $13.3 million, or
13.0%, and net sales in Action Sports decreased by $1.0 million, or 1.0%.
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Team Sports net sales increased primarily as a result of:
| growth in sales of football helmets due to continued market share gains; |
| the decision to transition sales of baseball and softball products to later in the year to better coincide with the retail selling season, and higher sales of baseball bats resulting from rule changes by governing bodies of certain baseball leagues; |
| higher sales of ice hockey sticks due to the recent new product launch, and |
| new football apparel product offerings; |
partially offset by:
| lower sales of football equipment reconditioning services due to the timing of when services were performed, and |
| closeout sales of ice hockey skates and protective equipment. |
Action Sports net sales decreased primarily as a result of:
| reduced demand for snow helmets in the European market due to high retail inventory levels; |
partially offset by:
| the introduction of Giro branded cycling shoes; |
| higher sales of snow goggles driven by strong preseason orders, and |
| growth in sales of Easton branded cycling wheels and components in the aftermarket and to OEM customers. |
Net sales in Team Sports and Action Sports during the first three fiscal quarters of 2011 were
positively impacted by favorable foreign currency exchange rate movements of $2.3 million and $2.1
million, respectively. On a constant currency basis, net sales in Team Sports increased by $19.0
million, or 5.7%, and net sales in Action Sports increased by $8.7 million or 3.3%.
Team Sports net sales increased primarily as a result of:
| growth in sales of football helmets due to continued market share gains; |
| higher sales of baseball bats resulting from new products and rule changes by governing bodies of certain baseball leagues; |
| higher sales of ice hockey sticks due to the recent new product launch; |
| higher sales of batting helmets due to the popularity of new product offerings, and |
| increased sales of baseball and softball apparel; |
partially offset by:
| closeout sales of ice hockey equipment. |
Action Sports net sales increased primarily as a result of:
| higher sales of cycling helmets and accessories; |
| the introduction of Giro branded cycling shoes; |
| growth in sales of Easton branded cycling wheels and components in the aftermarket and to OEM customers, and |
| increased sales of powersports helmets to specialty dealers due to enhanced product offerings; |
partially offset by:
| reduced demand for snow helmets in the European market due to high retail inventory levels; |
| lower sales of licensed cycling helmets in the mass channel, and |
| reduced sales of auto racing helmets and accessories due to the decision to license the Bell brand to a third-party for these products. |
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Cost of Sales
The following table sets forth for the periods indicated, cost of sales for each of our
segments:
Fiscal Quarter Ended | Three Fiscal Quarters Ended | |||||||||||||||||||||||||||||||
October 1, | % of | October 2, | % of | October 1, | % of | October 2, | % of | |||||||||||||||||||||||||
2011 | Net Sales | 2010 | Net Sales | 2011 | Net Sales | 2010 | Net Sales | |||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Team Sports |
$ | 71.7 | 61.4 | % | $ | 63.9 | 62.3 | % | $ | 227.8 | 64.6 | % | $ | 206.7 | 62.4 | % | ||||||||||||||||
Action Sports |
65.1 | 68.0 | % | 65.3 | 67.8 | % | 189.3 | 68.8 | % | 185.7 | 70.2 | % | ||||||||||||||||||||
$ | 136.8 | 64.4 | % | $ | 129.2 | 65.0 | % | $ | 417.1 | 66.4 | % | $ | 392.4 | 65.9 | % | |||||||||||||||||
For the third fiscal quarter of 2011, the decrease in Team Sports cost of sales as a
percentage of sales primarily relates to:
| improved sales mix of football helmets; |
partially offset by:
| closeout sales of ice hockey products at lower margins, and |
| higher transportation expenses due to the rise in fuel costs. |
For the first three fiscal quarters of 2011, the increase in Team Sports cost of sales as a
percentage of sales primarily relates to:
| closeout sales of ice hockey products at lower margins, and |
| higher transportation expenses due to the rise in fuel costs; |
partially offset by:
| favorable foreign currency exchange rates. |
For the third fiscal quarter of 2011, the increase in Action Sports cost of sales as a
percentage of sales primarily relates to:
| reduced sales of higher-margin snow helmets due to softness in the European market; |
partially offset by:
| increased sales of higher-margin cycling helmets; |
| increased sales and improved sales mix of cycling components in the aftermarket and to OEM customers; |
| higher volumes and lower closeout sales of powersports helmets, and |
| favorable foreign currency exchange rates. |
For the first three fiscal quarters of 2011, the decrease in Action Sports cost of sales as a
percentage of sales primarily relates to:
| increased sales of higher-margin cycling helmets; |
| increased sales and improved sales mix of cycling components in the aftermarket and to OEM customers; |
| higher volumes and lower closeout sales of powersports helmets, and |
| favorable foreign currency exchange rates; |
partially offset by:
| reduced sales of higher-margin snow helmets due to softness in the European market. |
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Gross Profit
The following table sets forth for the periods indicated, gross profit for each of our
segments:
Fiscal Quarter Ended | Three Fiscal Quarters Ended | |||||||||||||||||||||||||||||||
October 1, | % of | October 2, | % of | October 1, | % of | October 2, | % of | |||||||||||||||||||||||||
2011 | Net Sales | 2010 | Net Sales | 2011 | Net Sales | 2010 | Net Sales | |||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Team Sports |
$ | 45.0 | 38.6 | % | $ | 38.6 | 37.7 | % | $ | 124.7 | 35.4 | % | $ | 124.4 | 37.6 | % | ||||||||||||||||
Action Sports |
30.7 | 32.0 | % | 31.0 | 32.2 | % | 86.0 | 31.2 | % | 78.9 | 29.8 | % | ||||||||||||||||||||
$ | 75.7 | 35.6 | % | $ | 69.6 | 35.0 | % | $ | 210.7 | 33.6 | % | $ | 203.3 | 34.1 | % | |||||||||||||||||
For the third fiscal quarter of 2011, the increase in Team Sports gross margin primarily
relates to:
| improved sales mix of football helmets; |
partially offset by:
| closeout sales of ice hockey products at lower margins, and |
| higher transportation expenses due to the rise in fuel costs. |
For the first three fiscal quarters of 2011, the decrease in Team Sports gross margin
primarily relates to:
| closeout sales of ice hockey products at lower margins, and |
| higher transportation expenses due to the rise in fuel costs; |
partially offset by:
| favorable foreign currency exchange rates. |
For the third fiscal quarter of 2011, the decrease in Action Sports gross margin primarily
relates to:
| reduced sales of higher-margin snow helmets due to softness in the European market; |
partially offset by:
| increased sales of higher-margin cycling helmets; |
| increased sales and improved sales mix of cycling components in the aftermarket and to OEM customers; |
| higher volumes and lower closeout sales of powersports helmets, and |
| favorable foreign currency exchange rates. |
For the first three fiscal quarters of 2011, the increase in Action Sports gross margin
primarily relates to:
| increased sales of higher-margin cycling helmets; |
| increased sales and improved sales mix of cycling components in the aftermarket and to OEM customers; |
| higher volumes and lower closeout sales of powersports helmets, and |
| favorable foreign currency exchange rates; |
partially offset by:
| reduced sales of higher-margin snow helmets due to softness in the European market. |
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Selling, General and Administrative Expenses
SG&A expenses increased $5.3 million or 10.8% for the third fiscal quarter of 2011, as
compared to the third fiscal quarter of 2010. SG&A expenses increased $12.4 million or 8.6% for the
first three fiscal quarters of 2011, as compared to the first three fiscal quarters of 2010. The
increases for both periods relates primarily to:
| increased variable costs to support the sales growth; |
| increased spending on marketing to enhance brand awareness; |
| higher spending on research and development to enhance product offerings; |
| increased depreciation expense related to capital expenditures for information technology and facilities improvements; |
| re-establishment of the 401(k) plan company match in 2011; and |
| 2010 benefitting from a credit related to a mark-to-market adjustment for foreign currency exchange forward contracts; |
SG&A expenses for the first three fiscal quarters of 2011 also reflect increased compensation
expense due to the first fiscal quarter of 2010 benefitting from temporary pay cuts.
Amortization of Intangibles
Amortization of intangibles was $2.3 million for the third fiscal quarter of 2011, as compared
to $2.6 million for the third fiscal quarter of 2010. For the first three fiscal quarters of 2011,
amortization of intangibles was $7.2 million, as compared to $9.2 million for the first three
fiscal quarters of 2010. The decrease for both periods is due to certain intangible assets in the
Team Sports segment becoming fully amortized in 2011.
Interest Expense
Interest expense decreased $0.1 million during the third fiscal quarter of 2011, as compared
to the third fiscal quarter of 2010. For the first three fiscal quarters of 2011, interest expense
decreased $1.1 million, as compared to the first three fiscal quarters of 2010. The decrease for
the first three fiscal quarters relates to a favorable adjustment to reflect the change in the fair
value of the interest rate swap and a decrease in interest rates in 2011 for the revolving credit
facility, partially offset by costs incurred related to the amendment to the ABL Facility.
Income Tax Expense
Income tax expense was $3.7 million and $3.9 million for the third fiscal quarters of 2011 and
2010, respectively. The effective tax rate was 44.2% for the third fiscal quarter of 2011, as
compared to 56.4% for the third fiscal quarter of 2010. Income tax expense was $6.4 million and
$7.9 million for the first three fiscal quarters of 2011 and 2010, respectively. The effective tax
rate was 46.0% for the first three fiscal quarters of 2011, as compared to 49.6% for the first
three fiscal quarters of 2010. For both the fiscal quarter and three fiscal quarters of 2011 and
2010, the difference between the effective rate and the statutory rate is primarily attributable to
the permanent difference for equity compensation expense and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our financing requirements are subject to variations due to seasonal changes in working
capital levels. Internally generated funds are supplemented when necessary from external sources,
primarily from the ABL Facility (see Note 3 to the Consolidated Financial Statements hereinabove).
The cash generated from operating activities, the issuance of the Notes offered on December 3,
2009, and the availability under the ABL Facility are our principal sources of liquidity. Each is
described below. Based on our current level of operations and anticipated cost savings and
operational improvements, we believe our cash flow from operations, available cash and available
borrowings under the ABL Facility will be adequate to meet our liquidity needs for at least the
next twelve months. We cannot guarantee that the business will generate sufficient cash flow from
operations, that currently anticipated cost savings and operating improvements will be realized on
schedule or that future borrowings will be available to us under the ABL Facility in an amount
sufficient to enable us to repay our indebtedness, including our Notes, or to fund our other
liquidity needs. In addition, upon the occurrence of certain events, such as a change of control of
our Company, we could be required to repay or refinance our indebtedness. We cannot assure you that
we will be able to refinance any of our indebtedness, including the ABL Facility or our Notes, on
commercially reasonable terms or at all.
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Our ability to make payments to fund working capital, capital expenditures, debt service,
strategic acquisitions, joint ventures and investments will depend on our ability to generate cash
in the future, which is subject to general economic, financial, competitive, regulatory and other
factors that are beyond our control. Future indebtedness may impose various restrictions and
covenants on us which could limit our ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of business opportunities.
Our debt to capitalization ratio, which is total debt divided by the sum of total debt and
stockholders equity, was 49.9% at October 1, 2011, as compared to 50.5% at January 1, 2011. The
decrease was primarily attributable to the increase in retained earnings and decrease in debt,
partially offset by the negative effect of the foreign currency translation adjustment on
stockholders equity.
From time to time, we review acquisition opportunities as well as changes in the capital
markets. If we were to consummate a significant acquisition or elect to take advantage of favorable
opportunities in the capital markets, we may supplement availability or revise the terms under the
ABL Facility or complete public or private offerings of debt securities. If the capital markets
present favorable opportunities to purchase our own debt, we may do so.
9.750% Senior Secured Notes
In December 2009, in connection with the Refinancing, we issued the Notes. Interest is payable
on the Notes semi-annually on June 1 and December 1 of each year. We may redeem some or all of the
Notes prior to December 1, 2012 at a price equal to 100.00% of the principal amount, plus accrued
and unpaid interest and a make-whole premium. We may redeem all or any of the Notes on or after
December 1, 2012 and prior to December 1, 2013 at 107.313% of the principal amount of the Notes,
plus accrued and unpaid interest. We may redeem all or any of the Notes on or after December 1,
2013 and prior to December 1, 2014 at 104.875% of the principal amount of the Notes, plus accrued
and unpaid interest. We may redeem all or any of the Notes on or after December 1, 2014 and prior
to December 1, 2015 at 102.438% of the principal amount of the Notes, plus accrued and unpaid
interest. At any time on or after December 1, 2015, we may redeem all or any of the Notes at
100.00% of the principal amount of the Notes, plus accrued and unpaid interest. In addition, during
any twelve month period commencing on the issue date prior to December 1, 2012, we may redeem up to
10% of aggregate principal amount of the Notes at a price equal to 103.00% of their principal
amount, plus accrued and unpaid interest. At any time prior to December 1, 2012, we may also redeem
up to 35.00% of the aggregate principal amount of the Notes at a price equal to 109.750% of the
principal amount of the Notes, plus accrued and unpaid interest, with the net cash proceeds of one
or more equity offerings of our Company. We are not required to make mandatory redemption or
sinking fund payments with respect to the Notes. However, the Notes will become due and payable on
October 1, 2015 unless on or prior to August 28, 2015, the indebtedness of EB Sports under its
senior secured credit agreement with Wachovia Bank, N.A. and the lenders party thereto, or the New
Holdco Facility, has been either repaid or refinanced with indebtedness with a stated maturity that
is at least 91 days after the maturity date of the Notes.
Among other provisions, the indenture governing the Notes contains certain restrictions that
limits our ability to (1) incur, assume or guarantee additional debt, (2) pay dividends and make
other restricted payments, (3) create liens, (4) use the proceeds from sales of assets and
subsidiary stock, (5) enter into sale and leaseback transactions, (6) enter into agreements that
restrict dividends from subsidiaries, (7) change our business, (8) enter into transactions with
affiliates, and (9) transfer all or substantially all of our assets or enter into merger or
consolidation transactions. The indenture governing the Notes also requires our Company to make an
offer to repurchase the Notes at 101.00% of the principal amount following a change of control of
our Company, and at 100.00% of the principal amount with the proceeds of certain sales of assets
and subsidiary stock.
Subject to certain exceptions, the indenture governing the Notes permits us and our restricted
subsidiaries to incur additional indebtedness, including senior indebtedness and secured
indebtedness. In addition, the indenture will not limit the amount of indebtedness that our direct
or indirect parent entities, including EB Sports and RBG may incur.
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The ABL Facility
Concurrently with the issuance of the Notes on December 3, 2009, our Company entered into a
$250,000 senior secured asset-based revolving credit facility, subject to availability under each
of a United States and Canadian borrowing base, under which the amount, subject to certain
conditions, may be increased to allow borrowings of up to $300,000, together with certain of our
subsidiaries as Canadian Borrowers (as defined therein) or Guarantors (as defined therein), with
JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, the other agents party
thereto and the lenders party thereto, or the ABL Facility. The unused portion of the ABL Facility
(subject to borrowing base availability) is to be drawn from time to time for general corporate
purposes (including permitted acquisitions) and working capital needs. At October 1, 2011, we had
$36,000 outstanding under the ABL facility and $174,708 in availability.
Certain of the Companys wholly-owned domestic subsidiaries, and all subsidiaries that
guarantee the Notes (currently only our wholly-owned domestic subsidiaries) guarantee all of our
obligations (both United States and Canadian) under the ABL Facility. In addition, our wholly-owned
Canadian subsidiaries guarantee the obligations of the Canadian borrowings under the Canadian
sub-facility of the ABL Facility. Furthermore, we and our wholly-owned domestic subsidiaries,
subject to certain exceptions, grant security with respect to substantially all of our personal
property as collateral for our obligations (and related guarantees) under the ABL Facility,
including a first-priority security interest in cash and cash equivalents, lockbox and deposit
accounts, accounts receivable, inventory, other personal property relating to such inventory and
accounts receivable and all proceeds therefrom and a second-priority security interest in
substantially all of our equipment and all assets that secure the Notes on a first-priority basis.
The obligations of our Canadian subsidiaries that are borrowers under the Canadian sub-facility of
the ABL Facility are secured, subject to certain exceptions and permitted liens, on a
first-priority lien basis, by substantially all of the assets of our wholly-owned Canadian
subsidiaries and by our and our domestic subsidiaries assets on the same basis as borrowings under
the ABL Facility. At October 1, 2011, we had a zero balance outstanding under the Canadian ABL
facility.
On May 13, 2011, our Company entered into an Amendment and Restatement Agreement, or the
Amendment, among our Company, the Canadian Borrowers (as defined therein), the subsidiary
guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as collateral agent
and administrative agent and the other agents party thereto, which amended the ABL Facility. The
Amendment, among other things, reduced the interest rate applicable to loans made under the ABL
Facility and amended certain covenants thereunder applicable to our Company and our subsidiaries.
In addition, the Amendment extended the maturity date of loans under the ABL Facility from December
3, 2013 to May 13, 2016; provided that if the Credit and Guaranty Agreement, dated as of December
3, 2009 among EB Sports Corp., as borrower, RBG Holdings Corp., as guarantor, Wachovia Bank, N.A.,
as administrative agent and collateral agent and the lenders from time to time party thereto has
not been repaid or refinanced prior to July 1, 2015 with a new credit agreement that meets certain
criteria set forth in the ABL Facility, the loans under the ABL Facility will mature on July 1,
2015.
The interest rates per annum applicable to the loans under the ABL Facility, other than
swingline loans and protective advances, equal an applicable margin percentage plus, at our option,
(1) in the case of U.S. dollar denominated loans, a U.S. base rate or LIBOR, and (2) in the case of
Canadian dollar denominated loans, a Canadian base rate or CDOR. Swingline loans and protective
advances bear interest at the U.S. base rate for U.S. dollar denominated loans and the Canadian
base rate for Canadian dollar denominated loans, in each case, plus an applicable margin (and plus
an additional 2.0% in the case of protective advances). The applicable margin percentage for the
ABL Facility, as amended by the Amendment, ranges between 1.5% and 2.5% for LIBOR or CDOR and 0.5%
and 1.5% for the base rate, based upon our total leverage ratio as calculated under the ABL
Facility. In addition to paying interest on outstanding principal under the ABL Facility, we are
required to pay a commitment fee, in relation to the unutilized commitments, which ranges from
0.375% to 0.5% based upon our utilization of the ABL Facility (increasing when utilization is lower
and decreasing when utilization is higher). We are also required to pay customary letter of credit
fees.
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The ABL Facility requires that if excess gross availability is less than the greater of a
specified percentage of the gross borrowing base and a specified dollar amount, we must comply with
a minimum fixed charge coverage ratio test. In addition, the ABL Facility includes negative
covenants that, subject to significant exceptions, limit our ability and the ability of our
subsidiaries, to, among other things (1) incur additional debt, (2) create liens, (3) transfer all
or substantially all of our assets or enter into merger or consolidation transactions, (4) change
our business, (5) make investments, loans, advances, guarantees and acquisitions, (6) transfer or
sell assets, (7) enter into sale and leaseback transactions, (8) enter into swap agreements, (9)
enter into transactions with affiliates and (10) enter into agreements that restrict dividends from
subsidiaries.
Sources and Uses of Our Cash
Cash provided by operating activities was $22.5 million for the first three fiscal quarters of
2011, as compared to $47.8 million of cash provided by operating activities during the first three
fiscal quarters of 2010. The decrease in cash provided by operating activities primarily reflects
(1) higher accounts receivable due to the increase in net sales and the timing of those sales and
collections, (2) higher inventory from purchases made to support projected sales growth and (3)
lower accrued expenses.
We had $255.8 million in working capital as of October 1, 2011, as compared to $242.6 million
at January 1, 2011. The $13.2 million increase in working capital primarily results from the
increase in accounts receivable and inventory, and the decrease in accounts payable, all of which
were partially offset by the increase in accrued expenses.
Cash used in investing activities was $17.1 million for the first three fiscal quarters of
2011, as compared to $16.2 million used in the first three fiscal quarters of 2010. The increase
related to the additional purchase of property, plant and equipment for information technology and
enhancing new and existing products. Also, the first three fiscal quarters of 2010 includes $1.8
million in cash payments for the purchase of businesses, while no businesses were purchased in the
first three fiscal quarters of 2011.
Cash used in financing activities was $4.0 million for the first three fiscal quarters of
2011, as compared to $38.0 million of cash used in the first three fiscal quarters of 2010. The
primary reason for the difference is that the first three fiscal quarters of 2011 reflect $2.9
million of net payments on the ABL Facility, whereas the first three fiscal quarters of 2010
reflect $38.0 million of net payments on the ABL Facility. In addition, the first three fiscal
quarters of 2011 reflect $1.1 million of debt issuance costs, paid in conjunction with the
Amendment.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Risk
Our net sales and expenses are predominantly denominated in United States dollars. In fiscal
year 2010, approximately 85.2% of our net sales were in United States dollars, with substantially
all of the remaining sales in Canadian dollars, British pounds, Euros and Taiwan dollars. In
addition, we purchase a number of materials abroad, including finished goods and raw materials from
third parties. A significant amount of these purchases were from vendors in Asia, the majority of
which were located in mainland China. We may decide to increase our international sourcing in the
future. As a result, we have exposure to currency exchange risks.
Most of what we purchase from Asia are finished goods rather than raw materials. Because we
generally purchase these goods in United States dollars, changes in the value of the United States
dollar can have an immediate effect on the cost of our purchases. If we are unable to increase our
prices to a level sufficient to cover any increased costs, it could adversely affect our margins.
We enter into foreign currency exchange forward contracts to reduce the risks related to
inventory purchases and foreign currency based accounts receivable denominated in foreign
currencies. At October 1, 2011, there were foreign currency exchange forward contracts in effect
for the purchase of United States $0.6 million aggregated notional amounts, or approximately Cdn
$0.6 million. In the future, if we feel our foreign currency exposure has increased, we may
consider entering into additional hedging transactions to help mitigate that risk.
Considering both the anticipated cash flows from firm purchase commitments and anticipated
purchases for the next quarter and the foreign currency derivative instruments in place at October
1, 2011, a hypothetical 10% weakening of the United States dollar relative to other currencies
would not have a material adverse effect on our expected fourth quarter 2011 earnings or cash
flows. This analysis is dependent on actual purchases during the next quarter occurring within 90%
of budgeted forecasts. In addition, the effect of the hypothetical change in exchange rates ignores
the effect this movement may have on other variables, including competitive risk. If it were
possible to quantify this competitive impact, the results could well be different than the
sensitivity effects analysis described. In addition, it is unlikely currencies would uniformly
strengthen or weaken relative to the United States dollar. In reality, some currencies may weaken
while others may strengthen. Moreover, any movement of the United States dollar relative to other
currencies and its impact on materials costs would likely be partially offset by the impact on net
sales due to our sales internationally and the conversion of those international sales into United
States dollars.
Interest Rate Risk
We are exposed to market risk from changes in interest rates that can affect our operating
results and overall financial condition. As of October 1, 2011, the outstanding principal balance
under the ABL Facility was $36.0 million. The interest rates on the ABL Facility are based on (1)
the prime rate or LIBOR in the case of U.S. dollar denominated loans and (2) the prime rate or CDOR
in the case of Canadian dollar denominated loans, in each case plus an applicable margin
percentage. A hypothetical 10% increase from the current interest rate applicable to the ABL
Facility balance of $36.0 million would have resulted in approximately a $0.1 million increase in
interest expense for the quarter ended October 1, 2011.
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Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of October 1, 2011, the end of the fiscal period covered by this quarterly report, we
performed an evaluation, under the supervision and with the participation of management, including
our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of
the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our
Principal Executive Officer and Principal Financial Officer each concluded that our disclosure
controls and procedures are effective to ensure that information required to be disclosed in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the period covered
by this report that materially affected, or is reasonably likely to affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
We are subject to various product liability claims and/or suits brought against us for claims
involving damages for personal injuries or deaths. These claims allege use by claimants of products
manufactured by us and, in certain cases, products manufactured by others. The ultimate outcome of
these claims, or potential future claims, cannot be determined. Our management obtains an actuarial
analysis and has established an accrual for probable losses based on this analysis, which
considers, among other factors, our previous claims history and available information on alleged
claims. However, due to the uncertainty involved with estimates, actual results could vary
substantially from those estimates. There are four complaints for damages filed against the National Football League and certain of our entities by groups of
retired NFL players. Three of these suits are now pending in the Federal District Court in Los
Angeles, and the fourth is filed in the Los Angeles Superior Court. We
believe these complaints are without merit and we are vigorously defending against them. These
cases are at preliminary stages, and we are unable to predict outcomes, or reasonably estimate a
range of possible losses, if any. We maintain primary and excess product liability insurance
coverage for such claims under various policies.
We also are involved in various non-product liability claims and actions, including employment
related matters as well as claims relating to potential infringement of intellectual property
rights of others. In 2002, one of our competitors sued us in Canadian Federal Court alleging
infringement of a hockey skate patent. In 2010, we received an unfavorable judgment on the issue of
liability in this suit. Liability and damages are bifurcated proceedings in Canada, and we are now
beginning the damages phase of this proceeding. It is
not possible to accurately estimate any potential resulting monetary
liability at this time because the documents necessary to establish an
accurate assessment of any potential liability have not been disclosed to us. However, management
believes that this claim will not be material to our business or financial condition.
Item 1A. | Risk Factors |
There have been no material changes to the risk factors disclosed in our Annual Report on Form
10-K for the year ended January 1, 2011. The materialization of any risks and uncertainties
identified in Forward-Looking Statements contained in this report together with those previously
disclosed in the Form 10-K or those that are presently unforeseen could result in significant
adverse effects on our financial condition, results of operations and cash flows. See Part I, Item
2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Information in this report.
Item 6. | Exhibits |
(a) | The following exhibits are filed or incorporated by reference as part of this Form 10-Q. Each management contract or compensation plan required to be filed as an exhibit is identified by an asterisk (*): |
Exhibit | The filings referenced for | |||||
Number | Description of Exhibit | incorporation by reference are: | ||||
31.1 | Certification of the
Principal Executive Officer
pursuant to Section 302 of
the Sarbanes-Oxley Act of
2002
|
Filed herewith | ||||
31.2 | Certification of the
Principal Financial Officer
pursuant to Section 302 of
the Sarbanes-Oxley Act of
2002
|
Filed herewith | ||||
32.1 | Certification of the
Principal Executive Officer
and Principal Financial
Officer pursuant to the 18
U.S.C. Section 1350, as
adopted pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
|
Filed herewith |
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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.
EASTON-BELL SPORTS, INC. | ||||
Registrant | ||||
Dated: November 15, 2011
|
/s/ Paul E. Harrington
|
|||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Dated: November 15, 2011
|
/s/ Mark A. Tripp
|
|||
Chief Financial Officer | ||||
(Principal Financial Officer) |
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