Attached files
file | filename |
---|---|
EX-31.1 - EX-31.1 - EASTON-BELL SPORTS, INC. | d69887exv31w1.htm |
EX-31.2 - EX-31.2 - EASTON-BELL SPORTS, INC. | d69887exv31w2.htm |
EX-32.1 - EX-32.1 - EASTON-BELL SPORTS, INC. | d69887exv32w1.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 3, 2009
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 | 20-1636283 | |
(State or other jurisdiction of incorporation or organization) |
(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 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 (Do not check if a smaller reporting company) |
Smaller reporting company o |
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 October 31, 2009, 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)
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
October 3, | January 3, | |||||||
2009 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 49,674 | $ | 41,301 | ||||
Accounts receivable, net |
213,952 | 213,561 | ||||||
Inventories, net |
128,434 | 147,163 | ||||||
Prepaid expenses |
4,916 | 8,183 | ||||||
Deferred taxes |
9,133 | 9,128 | ||||||
Other current assets |
9,668 | 7,605 | ||||||
Total current assets |
415,777 | 426,941 | ||||||
Property, plant and equipment, net |
46,727 | 45,874 | ||||||
Deferred financing fees, net |
9,372 | 12,055 | ||||||
Intangible assets, net |
293,763 | 303,818 | ||||||
Goodwill |
203,541 | 203,456 | ||||||
Other assets |
1,290 | 5,501 | ||||||
Total assets |
$ | 970,470 | $ | 997,645 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 3,350 | $ | 12,405 | ||||
Current portion of capital lease obligations |
21 | 22 | ||||||
Accounts payable |
67,097 | 81,245 | ||||||
Accrued expenses |
46,028 | 50,397 | ||||||
Total current liabilities |
116,496 | 144,069 | ||||||
Long-term debt, less current portion |
408,792 | 443,383 | ||||||
Capital lease obligations, less current portion |
107 | 123 | ||||||
Deferred taxes |
44,840 | 39,794 | ||||||
Other noncurrent liabilities |
22,916 | 23,252 | ||||||
Total liabilities |
593,151 | 650,621 | ||||||
Stockholders equity: |
||||||||
Common stock: $0.01 par value, 100 shares authorized, 100 shares issued and outstanding at
October 3, 2009 and January 3, 2009 |
| | ||||||
Additional paid-in capital |
356,837 | 341,197 | ||||||
Retained earnings |
22,528 | 11,373 | ||||||
Accumulated other comprehensive loss |
(2,046 | ) | (5,546 | ) | ||||
Total stockholders equity |
377,319 | 347,024 | ||||||
Total liabilities and stockholders equity |
$ | 970,470 | $ | 997,645 | ||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited and amounts in thousands)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited and amounts in thousands)
Fiscal Quarter Ended | Three Fiscal Quarters Ended | |||||||||||||||
October 3, | September 27, | October 3, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
$ | 180,421 | $ | 203,369 | $ | 552,567 | $ | 606,318 | ||||||||
Cost of sales |
118,460 | 130,505 | 370,025 | 391,022 | ||||||||||||
Gross profit |
61,961 | 72,864 | 182,542 | 215,296 | ||||||||||||
Selling, general and administrative expenses |
40,444 | 46,127 | 129,609 | 135,767 | ||||||||||||
Restructuring and other infrequent expenses |
| | | 492 | ||||||||||||
Amortization of intangibles |
3,352 | 3,352 | 10,055 | 10,055 | ||||||||||||
Income from operations |
18,165 | 23,385 | 42,878 | 68,982 | ||||||||||||
Interest expense, net |
7,570 | 9,469 | 23,623 | 21,636 | ||||||||||||
Income before income taxes |
10,595 | 13,916 | 19,255 | 47,346 | ||||||||||||
Income tax expense |
4,306 | 7,573 | 8,100 | 23,148 | ||||||||||||
Net income |
6,289 | 6,343 | 11,155 | 24,198 | ||||||||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation adjustment |
1,530 | (1,098 | ) | 3,500 | (1,800 | ) | ||||||||||
Comprehensive income |
$ | 7,819 | $ | 5,245 | $ | 14,655 | $ | 22,398 | ||||||||
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)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and amounts in thousands)
Three Fiscal Quarters Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 11,155 | $ | 24,198 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
21,278 | 19,068 | ||||||
Amortization of deferred financing fees |
2,683 | 2,683 | ||||||
Equity compensation expense |
2,782 | 2,944 | ||||||
Deferred income tax expense |
5,041 | 18,446 | ||||||
Disposal of property, plant and equipment |
3 | 12 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
3,070 | (42,767 | ) | |||||
Inventories, net |
20,455 | 14,617 | ||||||
Other current and noncurrent assets |
5,330 | (3,042 | ) | |||||
Accounts payable |
(14,739 | ) | 5,618 | |||||
Accrued expenses |
(5,141 | ) | 16,417 | |||||
Other current and noncurrent liabilities |
(336 | ) | 3,466 | |||||
Net cash provided by operating activities |
51,581 | 61,660 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property, plant and equipment |
(12,096 | ) | (10,955 | ) | ||||
Net cash used in investing activities |
(12,096 | ) | (10,955 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on senior term notes |
(43,646 | ) | (2,512 | ) | ||||
Capital contribution from Parent |
12,858 | | ||||||
Proceeds from revolving credit facility |
6,000 | 53,000 | ||||||
Payments on revolving credit facility |
(6,000 | ) | (28,500 | ) | ||||
Payments on capital lease obligations |
(17 | ) | (16 | ) | ||||
Net cash (used in) provided by financing activities |
(30,805 | ) | 21,972 | |||||
Effect of exchange rate changes on cash and cash equivalents |
(307 | ) | (81 | ) | ||||
Increase in cash and cash equivalents |
8,373 | 72,596 | ||||||
Cash and cash equivalents, beginning of period |
41,301 | 16,923 | ||||||
Cash and cash equivalents, end of period |
$ | 49,674 | $ | 89,519 | ||||
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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
1. Basis of Presentation
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. (RBG), which, in turn, is a wholly-owned subsidiary of EB Sports
Corp. (EB Sports). Easton-Bell Sports, LLC (the Parent) owns all of the outstanding voting
securities of EB Sports and is our ultimate parent company.
These unaudited consolidated financial statements of the Company included herein have been
prepared by the Company in accordance with accounting principles generally accepted in the United
States (GAAP) for interim financial information and the rules and regulations of the Securities
and Exchange Commission (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 the Companys audited financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended January 3, 2009. Results for interim
periods are not necessarily indicative of the results for the year.
The Companys fiscal quarters are 13-week periods ending on Saturdays. As a result, the
Companys third quarter of fiscal year 2009 ended on October 3, and the third quarter of fiscal
year 2008 ended on September 27.
2. Goodwill and Other Intangible Assets
The Companys acquired intangible assets are as follows:
October 3, 2009 | January 3, 2009 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amounts | Amortization | Amounts | Amortization | |||||||||||||
Amortizable intangible assets: |
||||||||||||||||
Trademarks and tradenames |
$ | 1,702 | $ | (1,517 | ) | $ | 1,702 | $ | (1,333 | ) | ||||||
Customer relationships |
59,180 | (29,566 | ) | 59,180 | (25,484 | ) | ||||||||||
Patents |
60,345 | (28,202 | ) | 60,345 | (23,358 | ) | ||||||||||
Licensing and other |
5,900 | (4,463 | ) | 5,900 | (3,518 | ) | ||||||||||
Total |
$ | 127,127 | $ | (63,748 | ) | $ | 127,127 | $ | (53,693 | ) | ||||||
Indefinite-lived intangible assets: |
||||||||||||||||
Trademarks and tradenames |
$ | 230,384 | $ | 230,384 | ||||||||||||
Goodwill by segment is as follows:
Team | Action | |||||||||||
Sports | Sports | Consolidated | ||||||||||
Balance as of January 3, 2009 |
$ | 141,992 | $ | 61,464 | $ | 203,456 | ||||||
Adjustment to purchase price allocations |
85 | | 85 | |||||||||
Balance as of October 3, 2009 |
$ | 142,077 | $ | 61,464 | $ | 203,541 | ||||||
Goodwill is tested for impairment in each of the Companys segments on an annual basis in
December, and more often if indications of impairment exist as required under the Financial
Accounting Standards Board (FASB) Accounting Standards Codification 350-20 Goodwill. The results
of the Companys analyses conducted in 2008 indicated that no impairment in the carrying amount of
goodwill was required.
During the first fiscal quarter of 2009, the carrying amount of goodwill related to the Team
Sports segment was increased by $85 due to an earn-out payment related to a Riddell acquisition.
There were no changes to goodwill during the second and third fiscal quarters of 2009.
7
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
3. Long-Term Debt
Long-term debt consisted of the following:
October 3, 2009 | January 3, 2009 | |||||||
Senior Secured Credit Facility: |
||||||||
Term loan facility |
$ | 272,142 | $ | 315,788 | ||||
8.375% Senior subordinated notes due 2012 |
140,000 | 140,000 | ||||||
Capital lease obligations |
128 | 145 | ||||||
Total long-term debt |
412,270 | 455,933 | ||||||
Less current maturities of long-term debt |
(3,371 | ) | (12,427 | ) | ||||
Long-term debt, less current portion |
$ | 408,899 | $ | 443,506 | ||||
Senior Secured Credit Facility
On March 16, 2006, in connection with the Easton acquisition, the Company entered into a
Credit and Guaranty Agreement (the Credit Agreement) which provided for (i) a $335,000 term loan
facility, (ii) a $70,000 U.S. revolving credit facility and (iii) a Cdn $12,000 Canadian revolving
credit facility. All three facilities are scheduled to mature in March 2012. The Companys U.S. and
Canadian revolving credit facilities are available to provide financing for working capital and
general corporate purposes. At October 3, 2009, the Company had $272,142 outstanding under the term
loan facility and zero outstanding under both the U.S. and the Canadian revolving credit
facilities.
The interest rates per annum applicable to the loans under the Credit Agreement, other than
swingline loans, equal an applicable margin percentage plus, at the Companys 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 a Canadian bankers acceptance rate. Swingline
loans bear interest at a rate equal to an applicable margin percentage plus the U.S. base rate for
U.S. dollar denominated loans or the Canadian base rate for Canadian dollar denominated loans, as
applicable. The applicable margin percentage for the term loan is initially 1.75% for LIBOR and
0.75% for the U.S. base rate, which is subject to adjustment to 1.50% for LIBOR and 0.50% for the
U.S. base rate based upon the Companys leverage ratio as calculated under the Credit Agreement.
The applicable margin percentage for the revolving loan facilities is initially 2.00% for LIBOR or
Canadian bankers acceptance rate and 1.00% for the U.S. and Canadian base rates. The applicable
margin percentage for the revolving loan facilities and swingline loan facilities varies between
2.25% and 1.50% for LIBOR or Canadian bankers acceptance rate, or between 1.25% and 0.50% for the
U.S. and Canadian base rates, based upon the leverage ratio as calculated under the Credit
Agreement.
The Company is the borrower under the term loan facility and U.S. revolving credit facility
and the Companys Canadian subsidiaries are the borrowers under the Canadian revolving credit
facility. Under the Credit Agreement, RBG and certain of the Companys domestic subsidiaries have
guaranteed all of the Companys obligations (both U.S. and Canadian), and the Company and certain
of the Companys Canadian subsidiaries have guaranteed the obligations under the Canadian revolving
credit facility. Additionally, the Company and its subsidiaries have granted security with respect
to substantially all of their real and personal property as collateral for the Companys U.S. and
Canadian obligations (and related guarantees) under the Credit Agreement. Furthermore, certain of
the Companys domestic subsidiaries and certain of the Companys other Canadian subsidiaries have
granted security with respect to substantially all of their real and personal property as
collateral for the obligations (and related guarantees) under the Canadian revolving credit
facility, and in the case of the Companys domestic subsidiaries, generally the obligations (and
related guarantees) under the Credit Agreement.
The Credit Agreement imposes limitations on the Companys ability and its subsidiaries
ability to incur, assume or permit to exist additional indebtedness, create or permit liens on
their assets, make investments and loans, engage in certain mergers or other fundamental changes,
dispose of assets, make distributions or pay dividends or repurchase stock, prepay subordinated
debt, enter into transactions with affiliates, engage in sale-leaseback transactions and make
capital expenditures. In addition, the Credit Agreement requires the Company to comply on a
quarterly and annual basis with certain financial covenants, including a maximum total leverage
ratio test, a minimum interest coverage ratio test and an annual maximum capital expenditure limit.
The Credit Agreement contains events of default customary for such financings, including but
not limited to nonpayment of principal, interest, fees or other amounts when due; violation of
covenants; failure of any representation or warranty to be true in all material respects when made
or deemed made; cross default and cross acceleration to certain indebtedness; certain ERISA events;
change of control; dissolution, insolvency and bankruptcy events; material judgments; and
actual or asserted invalidity of the guarantees or security documents. Some of these events of
default allow for grace periods and are subject to materiality thresholds.
8
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
As of July 4, 2009, the Company was not in compliance with the maximum total leverage ratio
test as set forth in the Credit Agreement. However, this event of non-compliance was cured on
August 14, 2009 through the exercise of a cure right as provided for in the Credit Agreement. The
cure right provides the Company the right to receive cash common equity infusions in an amount that
is necessary to satisfy the financial covenant tests on a pro-forma basis. The cure right capital
contribution amount is considered additional consolidated adjusted EBITDA, as defined in the Credit
Agreement, for purposes of measuring compliance with the financial covenants for the fiscal quarter
ended July 4, 2009. In subsequent periods, this cure amount will continue to be considered a
component of consolidated adjusted EBITDA for the next three fiscal quarters on a trailing four
quarter calculation basis. The cure amount is limited such that it cannot exceed the amount
required for purposes of complying with the financial covenants, nor can this cure right be
exercised again in the following two succeeding quarters. Additionally, the cure amount is limited
in any case to a maximum amount of $15,000 in the aggregate since March 16, 2006.
The cure right cash common equity infusion necessary to cure the Companys non-compliance with
the financial covenants test as of July 4, 2009, was received by the Parent and EB Sports from
certain existing investors in the Parent and members of management, including Paul Harrington, the
Companys President and Chief Executive Officer, on August 14, 2009. In order to finance this
common equity infusion, the Parent issued Class C Common Units and EB Sports issued shares of
Series A preferred stock to the participants of the financing, which included certain existing
investors of the Parent and Mr. Harrington. The Parent used the proceeds of its issuance of Class C
Common Units to pay its expenses related to the financing of the Companys cure right and to
maintain a balance for the Parents future expenses. EB Sports used a portion of the proceeds from
its issuance of Series A preferred stock to pay its expenses related to the financing of the
Companys cure right and the balance of the proceeds was contributed to the capital of RBG, which
in turn, contributed the necessary cash equity infusion, in the amount of $12,858, to the capital
of the Company. The $12,858 was then used by the Company to pay down the term loan facility. As a
result of the exercise of this cure, the Company was in compliance with the covenants of the Credit
Agreement, and was deemed to have satisfied the requirements of such financial covenants as of July
4, 2009.
On September 29, 2009, the Company made an additional payment towards the principal balance on
the term loan facility in the amount of $30,000. As of October 3, 2009, the Company was in
compliance with all of its covenants under the Credit Agreement.
Senior Subordinated Notes
On September 30, 2004, the Company issued $140,000 of 8.375% senior subordinated notes due
October 2012. The Companys indebtedness under its senior subordinated notes was not amended in
connection with the acquisition of Easton and otherwise remains outstanding. The senior
subordinated notes are general unsecured obligations and are subordinated in right of payment to
all existing and future senior indebtedness. Interest is payable on the notes semi-annually on
April 1 and October 1 of each year. The Company may currently redeem the notes, in whole or in
part, at 102.094% of the principal amount, plus accrued interest. The redemption price declines to
100% of the principal amount, plus accrued interest, at any time on or after October 1, 2010.
The indenture governing the senior subordinated notes contains certain restrictions on the
Company, including restrictions on its ability to incur indebtedness, pay dividends, make
investments, grant liens, sell assets and engage in certain other activities. The senior
subordinated notes are guaranteed by all of the Companys domestic subsidiaries.
Other
The Company has arrangements with its lender under the Credit Agreement to issue standby
letters of credit or similar instruments, which guarantee the Companys obligations for the
purchase of certain inventories and for potential claims exposure for insurance coverage.
Outstanding letters of credit issued under the revolving credit facilities totaled $3,597 and
$3,782 at October 3, 2009 and September 27, 2008, respectively.
Cash payments for interest were $10,163 and $4,204 for the fiscal quarters ended October 3,
2009 and September 27, 2008, respectively. For the first three fiscal quarters, cash payments for
interest were $22,874 and $18,802 for 2009 and 2008, respectively.
The Company amortized $894 of debt issuance costs for both the third fiscal quarter of 2009
and 2008. For the first three fiscal quarters, the Company amortized $2,683 of debt issuance costs
for both 2009 and 2008.
9
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
4. Accrued Expenses
Accrued expenses consist of the following:
October 3, 2009 | January 3, 2009 | |||||||
Salaries, wages, commissions and bonuses |
$ | 7,453 | $ | 13,717 | ||||
Advertising |
4,582 | 4,919 | ||||||
Rebates |
5,058 | 4,160 | ||||||
Warranty |
3,488 | 3,663 | ||||||
Product liability current portion |
4,161 | 3,647 | ||||||
Royalties |
1,528 | 1,771 | ||||||
Interest |
1,427 | 6,335 | ||||||
Income taxes |
3,549 | 1,563 | ||||||
Other |
14,782 | 10,622 | ||||||
Total accrued expenses |
$ | 46,028 | $ | 50,397 | ||||
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 3, 2009 | January 3, 2009 | |||||||
Raw materials |
$ | 18,007 | $ | 17,083 | ||||
Work-in-process |
2,215 | 2,567 | ||||||
Finished goods |
108,212 | 127,513 | ||||||
Inventories, net |
$ | 128,434 | $ | 147,163 | ||||
6. Recent Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards Update No. 2009-01 Topic 105 Generally
Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards
No. 168 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles, (ASU 2009-01). ASU 2009-01 establishes the FASB Accounting Standards
Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in preparation of financial statements in conformity with
generally accepted accounting principles in the United States. ASU 2009-01 is effective for interim
and annual periods ending after September 15, 2009. ASU 2009-01 was adopted by the Company in the
third fiscal quarter of 2009 and did not impact the Companys financial position or results of
operations.
In August 2009, the FASB issued Accounting Standards Update No. 2009-03 SEC Update
Amendments to Various Topics Containing SEC Staff Accounting Bulletins (ASU 2009-03). This update
represents technical corrections to various topics containing SEC Staff Accounting Bulletins to
update cross-references to codification text. ASU 2009-03 was effective as of August 24, 2009,
which the Company adopted in the third fiscal quarter of 2009 and did not impact the Companys
financial position or results of operations.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05 Fair Value
Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value (ASU 2009-05).
This update provides amendments to ASC 820-10, for fair value measurement of liabilities and
provides clarification that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure fair value using
prescribed methods. ASU 2009-05 is effective for the first reporting period (including interim
periods) beginning after issuance. The Company is currently evaluating the potential impact of
adopting ASU 2009-05 on its financial position and results of operations.
10
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
7. Segment Reporting
The Company has two reportable segments: Team Sports and Action Sports. The Companys Team
Sports segment primarily consists of football, baseball, softball, ice hockey and other team sports
products and reconditioning services related to certain of these products. The Companys Action
Sports segment primarily consists of helmets, equipment, components and accessories for cycling,
snow sports and powersports and fitness related products. The Company evaluates segment performance
primarily based on income from operations excluding equity compensation expense, corporate
expenses, restructuring expenses and amortization of intangibles. The Companys selling, general
and administrative expenses, excluding corporate expenses, are charged to each segment based on
where the expenses are incurred. Segment operating income as presented by the Company may not be
comparable to similarly titled measures used by other companies. In addition, the expense
components of operating income may not be comparable across Company segments.
Segment results for the fiscal quarter and three fiscal quarters ended October 3, 2009 and
September 27, 2008, respectively, are as follows:
Team | Action | |||||||||||
Fiscal Quarter Ended | Sports | Sports | Consolidated | |||||||||
October 3, 2009 |
||||||||||||
Net sales |
$ | 91,186 | $ | 89,235 | $ | 180,421 | ||||||
Segment income from operations |
11,831 | 14,710 | 26,541 | |||||||||
Depreciation |
2,396 | 1,417 | 3,813 | |||||||||
Capital expenditures |
2,316 | 1,601 | 3,917 | |||||||||
September 27, 2008 |
||||||||||||
Net sales |
$ | 112,609 | $ | 90,760 | $ | 203,369 | ||||||
Segment income from operations |
22,011 | 11,041 | 33,052 | |||||||||
Depreciation |
1,687 | 1,416 | 3,103 | |||||||||
Capital expenditures |
2,195 | 2,047 | 4,242 |
Team | Action | |||||||||||
Three Fiscal Quarters Ended | Sports | Sports | Consolidated | |||||||||
October 3, 2009 |
||||||||||||
Net sales |
$ | 299,818 | $ | 252,749 | $ | 552,567 | ||||||
Segment income from operations |
38,846 | 31,314 | 70,160 | |||||||||
Depreciation |
6,662 | 4,561 | 11,223 | |||||||||
Capital expenditures |
6,938 | 5,158 | 12,096 | |||||||||
September 27, 2008 |
||||||||||||
Net sales |
$ | 345,837 | $ | 260,481 | $ | 606,318 | ||||||
Segment income from operations |
67,952 | 27,775 | 95,727 | |||||||||
Depreciation |
4,790 | 4,223 | 9,013 | |||||||||
Capital expenditures |
6,805 | 4,150 | 10,955 |
Team | Action | |||||||||||
Sports | Sports | Consolidated | ||||||||||
Assets |
||||||||||||
As of October 3, 2009 |
$ | 597,426 | $ | 373,044 | $ | 970,470 | ||||||
As of January 3, 2009 |
609,793 | 387,852 | 997,645 |
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 3, 2009 | September 27, 2008 | October 3, 2009 | September 27, 2008 | |||||||||||||
Segment income from operations |
$ | 26,541 | $ | 33,052 | $ | 70,160 | $ | 95,727 | ||||||||
Equity compensation expense |
(928 | ) | (1,101 | ) | (2,782 | ) | (2,944 | ) | ||||||||
Corporate expenses |
(4,096 | ) | (5,214 | ) | (14,445 | ) | (13,254 | ) | ||||||||
Restructuring and other infrequent expenses |
| | | (492 | ) | |||||||||||
Amortization of intangibles |
(3,352 | ) | (3,352 | ) | (10,055 | ) | (10,055 | ) | ||||||||
Consolidated income from operations |
$ | 18,165 | $ | 23,385 | $ | 42,878 | $ | 68,982 | ||||||||
11
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
8. Product Liability, Litigation and Other Contingencies
Product Liability
The Company is subject to various product liability claims and/or suits brought against it for
claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths
relate to the use by claimants of products manufactured by the Company and, in certain cases,
products manufactured by others. The ultimate outcome of these claims, or potential future claims,
cannot be determined. Management obtains an actuarial analysis and has established an accrual for
probable losses based on this analysis, which considers, among other factors, the Companys
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.
The 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 Companys first layer excess
policy is written under a multi-year program with a combined limit of $25,000 excess of $3,000
expiring in January 2010. The Company also carries an annually-renewed second layer excess
liability policy providing an additional limit of $15,000 excess of $28,000 expiring January 2010,
for a total limit of $43,000. For claims occurring on or after August 1, 2008, and certain other
claims that occurred during previous claims-made policy periods, the primary portion of the
Companys product liability coverage is written under a policy expiring in January 2010 with a
$2,000 limit per occurrence excess of a $1,000 self-insured retention for helmets and $500
self-insured retention for all other products.
Litigation and Other Contingencies
In addition to the matters discussed in the preceding paragraphs, the Company is a party to
various non-product liability legal claims and actions incidental to its business, including
without limitation, claims relating to intellectual property as well as employment related matters.
Management believes that none of these claims or actions, either individually or in the aggregate,
is material to its business or financial condition.
9. Income Taxes
The Company recorded income tax expense of $8,100 and $23,148 for the first three fiscal
quarters ended October 3, 2009, and September 27, 2008, respectively. The Companys effective tax
rate was 42.1% through the first three fiscal quarters of 2009, as compared to 48.9% through the
first three fiscal quarters of 2008. For the first three fiscal quarters ended October 3, 2009, the
difference between the effective rate and the statutory rate is primarily attributable to the
permanent difference for equity compensation expense. For the first three fiscal quarters ended
September 27, 2008, the difference between the effective rate and the statutory rate is primarily
attributable to the permanent difference for equity compensation expense and the permanent
difference for Section 956 U.S. income recognition related to Canadas investment in U.S. property.
10. Derivative Instruments and Hedging Activity
ASC 815, Derivatives and Hedging (ASC 815), established accounting and reporting standards
for derivative instruments and hedging activities and requires that all derivatives be included on
the balance sheet as an asset or liability measured at fair value and that changes in fair value be
recognized currently 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 (loss) income. The deferred
items are recognized in the period the derivative contract is settled. As of October 3, 2009, the
Company had not designated any of its derivative instruments as hedges, and therefore, has recorded
the changes in fair value in the Consolidated Statements of Operations and Comprehensive Income.
The Company entered into an interest rate swap agreement effective April 15, 2008, as amended.
The interest rate swap has an initial fixed USD LIBOR of 2.921%, changing 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 had an
initial notional amount of $275,000 which decreased to $250,000 on April 15, 2009 and will further
decrease to $225,000 on April 15, 2010. The settlement dates for the swap occur monthly on the 15th
of each month commencing November 17, 2008 through April 15, 2010 and thereafter quarterly on the
15th of each July, October, January and April until the expiration of the
agreement on April 15, 2011. The swap agreement is not designated as a hedge, and therefore,
under ASC 815 is recorded at fair value at each balance sheet date in other noncurrent liabilities,
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.
12
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
ASC 820, Fair Value Measurements and Disclosures (ASC 820) which defines fair value,
establishes a framework for measuring fair value and requires enhanced disclosures about fair value
measurements. ASC 820 requires companies to disclose the fair value of their financial instruments
according to a fair value hierarchy, as defined therein. ASC 820 may require companies to provide
additional disclosures based on that hierarchy. To increase consistency and comparability in fair
value measurements, ASC 820 establishes 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, the 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.
At October 3, 2009, the swap fair value was determined through the use of a model that
considers various assumptions from a third party bank, including time value, yield curves, as well
as other relevant economic measures, which are inputs that are classified as Level 2. The fair
value of the swap was a liability of $7,599 and $7,657 at October 3, 2009 and January 3, 2009,
respectively, and is recorded in the non-current portion of other liabilities in the accompanying
Consolidated Balance Sheets with the corresponding charge to interest expense. During the third
fiscal quarter of 2009, interest expense reflects $1,608 related to the swap and a credit of $48
related to the change in the fair value of the swap. During the first three fiscal quarters of
2009, interest expense reflects $4,640 related to the swap and a credit of $58 related to the
change in the fair value of the swap.
The Company has foreign currency exchange forward contracts in place to reduce its risk
related to inventory purchases and foreign currency based accounts receivable. These contracts are
not designated as hedges, and therefore, under ASC 815 they 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
U.S. Dollars at October 3, 2009 and January 3, 2009 were as follows:
October 3, 2009 | January 3, 2009 | ||||||||||||||||
Foreign | Foreign | ||||||||||||||||
U.S. Dollars | Currency | U.S. Dollars | Currency | ||||||||||||||
Foreign Currency Exchange Forward Contracts: |
|||||||||||||||||
U.S. Dollars / Canadian Dollars |
$ | 40,370 | Cdn $ | 43,781 | $ | 21,950 | Cdn $ | 26,575 | |||||||||
U.S. Dollars / Euros |
694 | | 475 | | | | |||||||||||
U.S. Dollars / British Pounds |
388 | £ | 244 | | £ | |
As of October 3, 2009 and January 3, 2009, the fair value of the foreign currency exchange
forward contracts, using Level 2 inputs from a third party bank, represented a liability of
approximately $1,525 and zero, respectively. Changes in the fair value of the foreign currency
exchange contracts are reflected in selling, general and administrative expenses each period.
Under its Credit Agreement, the Company was required to have interest rate hedging agreements
in place by June 15, 2006 such that not less than 50% of its outstanding term and senior
subordinated indebtedness is fixed rate indebtedness. The Company with its interest rate swap had
approximately 95% and 91% of its outstanding term and senior subordinated indebtedness in fixed
rate indebtedness as of October 3, 2009 and January 3, 2009, respectively.
13
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
The assets and liabilities measured at fair value on a recurring basis, subject to the
disclosure requirements of ASC 820 at October 3, 2009, 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: |
||||||||||||
None |
$ | | $ | | $ | | ||||||
Liabilities: |
||||||||||||
Interest rate swap |
$ | | $ | 7,599 | $ | | ||||||
Foreign currency exchange forward contracts |
| 1,525 | | |||||||||
Total |
$ | | $ | 9,124 | $ | | ||||||
Fair Value of Financial Instruments
The carrying amounts reported in the 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 the Companys term loan facility and 8.375% senior subordinated notes are
based on quoted market prices for the same or similar issues on borrowing rates available to the
Company for loans with similar terms and average maturities.
The estimated fair values of the Companys long-term debt including accrued interest were as
follows:
October 3, 2009 | January 3, 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial liabilities: |
||||||||||||||||
Term loan facility |
$ | 273,454 | $ | 259,314 | $ | 319,076 | $ | 219,315 | ||||||||
8.375% senior subordinated notes |
140,112 | 129,612 | 143,044 | 101,044 |
11. Equity-Based Employee Compensation
On March 16, 2006, the Parent adopted its 2006 Equity Incentive Plan (the 2006 Plan), which
amended and restated its 2003 Equity Incentive Plan. The 2006 Plan provides for the issuance of
Class B Common Units of the Parent (Units), which represent profit interests in the Parent.
Accordingly, Class B unit holders are entitled to share in the distribution of profits of the
Parent above a certain threshold, which is defined as the fair value of the Unit at the date of
grant. The Units issued under the 2006 Plan vest based on both time and performance. Time vesting
occurs over a four-year period measured from the date of the grant and performance vesting is based
on achievement of the Companys performance goals for 2009 and 2010. In addition, a portion of the
Units, whether subject to time or performance vesting, become vested in the event of an initial
public offering. If a change of control occurs and a holder of the Units is continuously employed
by the Company until such change of control, then a portion of the unvested time based Units and
performance Units will vest in various amounts depending on the internal rate of return achieved by
certain investors in the Parent as a result of the change of control. The Units qualify as equity
instruments.
The Company records equity compensation under ASC 718-10, Compensation-Stock Compensation
(ASC 718-10), using the prospective transition method. Under ASC 718-10, the Company uses the
Black-Scholes Option Pricing Model to determine the fair value of the Units granted, similar to an
equity SAR (Stock Appreciation Right). This model uses such factors as the market price of the
underlying Units at date of issuance, floor of the Unit (dividend threshold), the expected term of
the Unit, which is approximately four years, utilizing the simplified method.
14
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
During the three fiscal quarters ended October 3, 2009, no Units were granted. During the
three fiscal quarters ended September 27, 2008, the following assumptions were used in the
Black-Scholes Option Pricing Model to value the Units:
Three Fiscal Quarters Ended | ||||
September 27, 2008 | ||||
Expected term |
4 years | |||
Dividend yield |
0.0 | % | ||
Forfeiture rate |
7.7 | % | ||
Risk-free interest rate |
1.5 to 2.0 | % | ||
Expected volatility(1) |
39.0 to 46.0 | % |
(1) | Expected volatility is based upon a peer group of companies given no historical data for the Units. |
The Company records compensation expense using the fair value of the Units granted after the
adoption of ASC 718-10 that are time vesting over the vesting service period on a straight-line
basis. As of October 3, 2009, there was $11,317 of unrecognized compensation costs, net of
estimated forfeitures, related to the Units, comprised of $3,093 related to time based vesting
units and $8,224 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 one year. The unrecognized cost related to the performance based vesting units will
be recognized when it becomes probable that the performance conditions will be met.
The Company recognized unit based compensation expense, included in selling, general and
administrative expenses for its Units during the fiscal quarter and three fiscal quarters ended
October 3, 2009 and September 27, 2008 were as follows:
Fiscal Quarter Ended | Three Fiscal Quarters Ended | |||||||||||||||
October 3, | September 27, | October 3, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Equity compensation expense |
$ | 928 | $ | 1,101 | $ | 2,782 | $ | 2,944 | ||||||||
The Companys Unit activity under the Plan for the three fiscal quarters ended October 3, 2009
is as follows:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Units | Fair Value | |||||||
Outstanding at January 3, 2009 |
27,898,556 | $ | 1.90 | |||||
Forfeited |
| $ | | |||||
Outstanding at April 4, 2009 |
27,898,556 | $ | 1.90 | |||||
Forfeited |
(210,000 | ) | $ | 1.76 | ||||
Outstanding at July 4, 2009 |
27,688,556 | $ | 1.90 | |||||
Forfeited |
(424,018 | ) | $ | 2.08 | ||||
Outstanding at October 3, 2009 |
27,264,538 | $ | 1.89 | |||||
Vested Units at October 3, 2009 |
12,299,443 | $ | 1.98 | |||||
12. Warranty Obligations
The Company records a product warranty obligation at the time of sale based on the Companys
historical experience. The Company estimates its 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, replacement product costs or service delivery
costs differ from the historical rates, revisions to the estimated warranty liability would be
required.
15
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
The following is a reconciliation of the changes in the Companys product warranty liability
for the first three fiscal quarters ended October 3, 2009 and September 27, 2008.
2009 | 2008 | |||||||
Beginning of fiscal year |
$ | 3,663 | $ | 3,390 | ||||
Warranty costs incurred during the period |
(991 | ) | (1,307 | ) | ||||
Warranty cost liability recorded during the period |
1,019 | 1,425 | ||||||
End of first fiscal quarter |
3,691 | 3,508 | ||||||
Warranty costs incurred during the period |
(1,301 | ) | (2,115 | ) | ||||
Warranty cost liability recorded during the period |
1,433 | 2,357 | ||||||
End of second fiscal quarter |
3,823 | 3,750 | ||||||
Warranty costs incurred during the period |
(1,261 | ) | (1,110 | ) | ||||
Warranty cost liability recorded during the period |
926 | 1,212 | ||||||
End of third fiscal quarter |
$ | 3,488 | $ | 3,852 | ||||
13. Related Party Transactions
Jas. D. Easton, Inc. is an affiliate of James L. Easton, a member of the board of managers of
the Parent and the board of directors of the Company, and former owner of Easton. In connection
with the acquisition of Easton, 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 the 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.
The Company has entered into a right of first offer agreement with Jas. D. Easton, Inc. and
Easton Technical Products, Inc. pursuant to which the 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 (i) March 16, 2016, (ii) the date Easton
Technical Products, Inc. no longer uses the name Easton, (iii) the effectiveness of any initial
public offering by Easton Technical Products, Inc. and (iv) 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. During the fiscal quarter ended October 3, 2009 and September 27, 2008, Easton
paid approximately $288 and $254, respectively, in rent pursuant to such affiliate leases. During
the first three fiscal quarters ended October 3, 2009 and September 27, 2008, Easton paid
approximately $864 and $1,033, respectively, in rent pursuant to such affiliate leases.
On October 1, 2004, Bell entered into a consulting agreement with Terry Lee, a member of the
board of managers of the Parent and the board of directors of the Company. Pursuant to the terms of
the consulting agreement, Mr. Lee agreed to provide the Company and its 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 the Company elects not to extend the
agreement.
Effective August 2008, the Parent agreed to compensate Richard Wenz, a member of the board of
managers of the Parent and the board of directors of the Company, for his services as Chair of the
Companys Audit Committee. In exchange for his services, Mr. Wenz is entitled to annual
compensation of $50.
14. Subsequent Events
As
of November 4, 2009, the date of issuance of this Form 10-Q for the quarter ended October
3, 2009, there were no items deemed to be reportable as a subsequent event.
16
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
15. Supplemental Guarantor Condensed Financial Information
In September 2004, in connection with the acquisition of Bell, the Company (presented as
issuer in the following tables) issued $140,000 of 8.375% senior subordinated notes due October
2012. The senior subordinated notes are general unsecured obligations and are subordinated in right
of payment to all existing or future senior indebtedness. The indenture governing the senior
subordinated notes contains certain restrictions on the Company, including restrictions on its
ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and engage
in certain other activities. The senior subordinated notes are guaranteed by all of the Companys
domestic subsidiaries (the Guarantors). Each subsidiary guarantor is wholly owned and the
guarantees are full and unconditional and joint and several. All other subsidiaries of the Company
do not guarantee the senior subordinated notes (the Non-Guarantors).
The following condensed consolidating financial statements present the results of operations,
financial position and cash flows of (i) the Issuer, (ii) the Guarantors, (iii) the Non-Guarantors
and (iv) eliminations to arrive at the information for the Company on a consolidated basis for the
third fiscal quarter of 2009 and the respective comparable periods for fiscal 2008. Separate
financial statements and other disclosures concerning the Guarantors are not presented because
management does not believe such information is material to investors. Therefore, each of the
Guarantors is combined in the presentation below.
17
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Balance Sheet
October 3, 2009
October 3, 2009
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 20,404 | $ | 15,150 | $ | 14,120 | $ | | $ | 49,674 | ||||||||||
Accounts receivable, net |
| 177,038 | 36,914 | | 213,952 | |||||||||||||||
Inventories, net |
| 110,485 | 17,949 | | 128,434 | |||||||||||||||
Prepaid expenses |
530 | 3,858 | 528 | | 4,916 | |||||||||||||||
Deferred taxes |
| 9,133 | | | 9,133 | |||||||||||||||
Other current assets |
| 7,432 | 2,236 | | 9,668 | |||||||||||||||
Total current assets |
20,934 | 323,096 | 71,747 | | 415,777 | |||||||||||||||
Property, plant and equipment, net |
18,774 | 27,151 | 802 | | 46,727 | |||||||||||||||
Deferred financing fees, net |
9,372 | | | | 9,372 | |||||||||||||||
Investments and intercompany receivables |
376,807 | 98,551 | 39,189 | (514,547 | ) | | ||||||||||||||
Intangible assets, net |
| 287,888 | 5,875 | | 293,763 | |||||||||||||||
Goodwill |
16,195 | 182,155 | 5,191 | | 203,541 | |||||||||||||||
Other assets |
| 1,258 | 32 | | 1,290 | |||||||||||||||
Total assets |
$ | 442,082 | $ | 920,099 | $ | 122,836 | $ | (514,547 | ) | $ | 970,470 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of long-term debt |
$ | 3,350 | $ | | $ | | $ | | $ | 3,350 | ||||||||||
Revolving credit facility |
| | | | | |||||||||||||||
Current portion of capital lease obligations |
| 21 | | | 21 | |||||||||||||||
Accounts payable |
| 60,750 | 6,347 | | 67,097 | |||||||||||||||
Accrued expenses |
3,280 | 33,104 | 9,644 | | 46,028 | |||||||||||||||
Total current liabilities |
6,630 | 93,875 | 15,991 | | 116,496 | |||||||||||||||
Long-term debt, less current portion |
408,792 | | | | 408,792 | |||||||||||||||
Capital lease obligations, less current portion |
| 107 | | | 107 | |||||||||||||||
Deferred taxes |
| 44,840 | | | 44,840 | |||||||||||||||
Other noncurrent liabilities |
| 15,483 | 7,433 | | 22,916 | |||||||||||||||
Long-term intercompany payables |
| 440,832 | 36,804 | (477,636 | ) | | ||||||||||||||
Total liabilities |
415,422 | 595,137 | 60,228 | (477,636 | ) | 593,151 | ||||||||||||||
Total stockholders equity |
26,660 | 324,962 | 62,608 | (36,911 | ) | 377,319 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 442,082 | $ | 920,099 | $ | 122,836 | $ | (514,547 | ) | $ | 970,470 | |||||||||
18
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Balance Sheet
January 3, 2009
January 3, 2009
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 14,829 | $ | 9,823 | $ | 16,649 | $ | | $ | 41,301 | ||||||||||
Accounts receivable, net |
| 190,615 | 22,946 | | 213,561 | |||||||||||||||
Inventories, net |
| 133,933 | 13,230 | | 147,163 | |||||||||||||||
Prepaid expenses |
1,246 | 6,638 | 299 | | 8,183 | |||||||||||||||
Deferred taxes |
| 9,128 | | | 9,128 | |||||||||||||||
Other current assets |
| 7,492 | 113 | | 7,605 | |||||||||||||||
Total current assets |
16,075 | 357,629 | 53,237 | | 426,941 | |||||||||||||||
Property, plant and equipment, net |
16,884 | 28,105 | 885 | | 45,874 | |||||||||||||||
Deferred financing fees, net |
12,055 | | | | 12,055 | |||||||||||||||
Investments and intercompany receivables |
407,926 | 97,353 | 5,352 | (510,631 | ) | | ||||||||||||||
Intangible assets, net |
| 297,740 | 6,078 | | 303,818 | |||||||||||||||
Goodwill |
16,195 | 182,070 | 5,191 | | 203,456 | |||||||||||||||
Other assets |
5,501 | | | | 5,501 | |||||||||||||||
Total assets |
$ | 474,636 | $ | 962,897 | $ | 70,743 | $ | (510,631 | ) | $ | 997,645 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of long-term debt |
$ | 12,405 | $ | | $ | | $ | | $ | 12,405 | ||||||||||
Current portion of capital lease obligations |
| 22 | | | 22 | |||||||||||||||
Accounts payable |
| 76,438 | 4,807 | | 81,245 | |||||||||||||||
Accrued expenses |
3,118 | 38,881 | 8,398 | | 50,397 | |||||||||||||||
Total current liabilities |
15,523 | 115,341 | 13,205 | | 144,069 | |||||||||||||||
Long-term debt, less current portion |
443,383 | | | | 443,383 | |||||||||||||||
Capital lease obligations, less current portion |
| 123 | | | 123 | |||||||||||||||
Deferred taxes |
| 39,794 | | | 39,794 | |||||||||||||||
Other noncurrent liabilities |
| 15,819 | 7,433 | | 23,252 | |||||||||||||||
Long-term intercompany payables |
| 477,636 | | (477,636 | ) | | ||||||||||||||
Total liabilities |
458,906 | 648,713 | 20,638 | (477,636 | ) | 650,621 | ||||||||||||||
Total stockholders equity |
15,730 | 314,184 | 50,105 | (32,995 | ) | 347,024 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 474,636 | $ | 962,897 | $ | 70,743 | $ | (510,631 | ) | $ | 997,645 | |||||||||
19
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Statement of Operations
Fiscal Quarter Ended October 3, 2009
Fiscal Quarter Ended October 3, 2009
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 169,593 | $ | 20,048 | $ | (9,220 | ) | $ | 180,421 | |||||||||
Cost of sales |
| 110,274 | 17,406 | (9,220 | ) | 118,460 | ||||||||||||||
Gross profit |
| 59,319 | 2,642 | | 61,961 | |||||||||||||||
Selling, general and administrative expenses |
6,311 | 30,466 | 3,667 | | 40,444 | |||||||||||||||
Amortization of intangibles |
| 3,352 | | | 3,352 | |||||||||||||||
(Loss) income from operations |
(6,311 | ) | 25,501 | (1,025 | ) | | 18,165 | |||||||||||||
Interest expense, net |
7,240 | 316 | 14 | | 7,570 | |||||||||||||||
Share of net income (loss) of subsidiaries under equity method |
19,840 | (447 | ) | | (19,393 | ) | | |||||||||||||
Income (loss) before income taxes |
6,289 | 24,738 | (1,039 | ) | (19,393 | ) | 10,595 | |||||||||||||
Income tax expense (benefit) |
| 4,898 | (592 | ) | | 4,306 | ||||||||||||||
Net income (loss) |
$ | 6,289 | $ | 19,840 | $ | (447 | ) | $ | (19,393 | ) | $ | 6,289 | ||||||||
Condensed Consolidating Statement of Operations
Fiscal Quarter Ended September 27, 2008
Fiscal Quarter Ended September 27, 2008
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 184,944 | $ | 31,308 | $ | (12,883 | ) | $ | 203,369 | |||||||||
Cost of sales |
(16 | ) | 118,162 | 25,242 | (12,883 | ) | 130,505 | |||||||||||||
Gross profit |
16 | 66,782 | 6,066 | | 72,864 | |||||||||||||||
Selling, general and administrative expenses |
7,204 | 35,897 | 3,026 | | 46,127 | |||||||||||||||
Amortization of intangibles |
| 3,352 | | | 3,352 | |||||||||||||||
(Loss) income from operations |
(7,188 | ) | 27,533 | 3,040 | | 23,385 | ||||||||||||||
Interest expense, net |
9,287 | 231 | (49 | ) | | 9,469 | ||||||||||||||
Share of net income (loss) of subsidiaries under equity method |
22,818 | 2,389 | | (25,207 | ) | | ||||||||||||||
Income (loss) before income taxes |
6,343 | 29,691 | 3,089 | (25,207 | ) | 13,916 | ||||||||||||||
Income tax expense |
| 6,873 | 700 | | 7,573 | |||||||||||||||
Net income (loss) |
$ | 6,343 | $ | 22,818 | $ | 2,389 | $ | (25,207 | ) | $ | 6,343 | |||||||||
20
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Statement of Operations
Three Fiscal Quarters Ended October 3, 2009
Three Fiscal Quarters Ended October 3, 2009
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 517,739 | $ | 64,747 | $ | (29,919 | ) | $ | 552,567 | |||||||||
Cost of sales |
| 348,325 | 51,619 | (29,919 | ) | 370,025 | ||||||||||||||
Gross profit |
| 169,414 | 13,128 | | 182,542 | |||||||||||||||
Selling, general and administrative expenses |
20,613 | 100,244 | 8,752 | | 129,609 | |||||||||||||||
Amortization of intangibles |
| 10,055 | | | 10,055 | |||||||||||||||
(Loss) income from operations |
(20,613 | ) | 59,115 | 4,376 | | 42,878 | ||||||||||||||
Interest expense, net |
22,903 | 719 | 1 | | 23,623 | |||||||||||||||
Share of net income (loss) of subsidiaries under equity method |
54,671 | 3,284 | | (57,955 | ) | | ||||||||||||||
Income (loss) before income taxes |
11,155 | 61,680 | 4,375 | (57,955 | ) | 19,255 | ||||||||||||||
Income tax expense |
| 7,009 | 1,091 | | 8,100 | |||||||||||||||
Net income (loss) |
$ | 11,155 | $ | 54,671 | $ | 3,284 | $ | (57,955 | ) | $ | 11,155 | |||||||||
Condensed Consolidating Statement of Operations
Three Fiscal Quarters Ended September 27, 2008
Three Fiscal Quarters Ended September 27, 2008
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 549,529 | $ | 87,018 | $ | (30,229 | ) | $ | 606,318 | |||||||||
Cost of sales |
| 357,823 | 63,428 | (30,229 | ) | 391,022 | ||||||||||||||
Gross profit |
| 191,706 | 23,590 | | 215,296 | |||||||||||||||
Selling, general and administrative expenses |
19,034 | 108,004 | 8,729 | | 135,767 | |||||||||||||||
Restructuring and other infrequent expenses |
| 492 | | | 492 | |||||||||||||||
Amortization of intangibles |
| 10,055 | | | 10,055 | |||||||||||||||
(Loss) income from operations |
(19,034 | ) | 73,155 | 14,861 | | 68,982 | ||||||||||||||
Interest expense, net |
21,257 | 603 | (224 | ) | | 21,636 | ||||||||||||||
Share of net income (loss) of subsidiaries under equity method |
64,489 | 10,736 | | (75,225 | ) | | ||||||||||||||
Income (loss) before income taxes |
24,198 | 83,288 | 15,085 | (75,225 | ) | 47,346 | ||||||||||||||
Income tax expense |
| 18,799 | 4,349 | | 23,148 | |||||||||||||||
Net income (loss) |
$ | 24,198 | $ | 64,489 | $ | 10,736 | $ | (75,225 | ) | $ | 24,198 | |||||||||
21
Table of Contents
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and amounts in thousands, except as specified)
Condensed Consolidating Statement of Cash Flows
Three Fiscal Quarters Ended October 3, 2009
Three Fiscal Quarters Ended October 3, 2009
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 11,155 | $ | 54,671 | $ | 3,284 | $ | (57,955 | ) | $ | 11,155 | |||||||||
Non-cash adjustments |
25,208 | (60,602 | ) | 9,226 | 57,955 | 31,787 | ||||||||||||||
Changes in operating assets and liabilities |
6,379 | 16,721 | (14,461 | ) | | 8,639 | ||||||||||||||
Net cash provided by (used in) operating activities |
42,742 | 10,790 | (1,951 | ) | | 51,581 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of property, plant and equipment |
(6,379 | ) | (5,446 | ) | (271 | ) | | (12,096 | ) | |||||||||||
Net cash used in investing activities |
(6,379 | ) | (5,446 | ) | (271 | ) | | (12,096 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Payments on capital lease obligations |
| (17 | ) | | | (17 | ) | |||||||||||||
Payments on senior term notes |
(43,646 | ) | | | | (43,646 | ) | |||||||||||||
Capital contribution from Parent |
12,858 | | | | 12,858 | |||||||||||||||
Net cash used in financing activities |
(30,788 | ) | (17 | ) | | | (30,805 | ) | ||||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | (307 | ) | | (307 | ) | |||||||||||||
Increase (decrease) in cash and cash equivalents |
5,575 | 5,327 | (2,529 | ) | | 8,373 | ||||||||||||||
Cash and cash equivalents, beginning of period |
14,829 | 9,823 | 16,649 | | 41,301 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 20,404 | $ | 15,150 | $ | 14,120 | $ | | $ | 49,674 | ||||||||||
Condensed Consolidating Statement of Cash Flows
Three Fiscal Quarters Ended September 27, 2008
Three Fiscal Quarters Ended September 27, 2008
Guarantor | Non-Guarantor | |||||||||||||||||||
Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 24,198 | $ | 64,489 | $ | 10,736 | $ | (75,225 | ) | $ | 24,198 | |||||||||
Non-cash adjustments |
18,832 | (57,207 | ) | 6,303 | 75,225 | 43,153 | ||||||||||||||
Changes in operating assets and liabilities |
(2,928 | ) | 10,848 | (13,611 | ) | | (5,691 | ) | ||||||||||||
Net cash provided by operating activities |
40,102 | 18,130 | 3,428 | | 61,660 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchase of property, plant and equipment |
(4,937 | ) | (6,004 | ) | (14 | ) | | (10,955 | ) | |||||||||||
Net cash used in investing activities |
(4,937 | ) | (6,004 | ) | (14 | ) | | (10,955 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Payments on capital lease obligations |
| (16 | ) | | | (16 | ) | |||||||||||||
Payments on senior term notes |
(2,512 | ) | | | | (2,512 | ) | |||||||||||||
Proceeds from senior secured credit facility, net |
24,500 | | | | 24,500 | |||||||||||||||
Net cash provided by (used in) financing activities |
21,988 | (16 | ) | | | 21,972 | ||||||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | (81 | ) | | (81 | ) | |||||||||||||
Increase in cash and cash equivalents |
57,153 | 12,110 | 3,333 | | 72,596 | |||||||||||||||
Cash and cash equivalents, beginning of period |
3,099 | 1,820 | 12,004 | | 16,923 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 60,252 | $ | 13,930 | $ | 15,337 | $ | | $ | 89,519 | ||||||||||
22
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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 2008 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,
snow sports, 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 and 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 brands
Easton® (baseball, softball and ice hockey equipment, apparel and cycling components),
Bell® (cycling and action sports helmets and accessories), Giro® (cycling and
snow sports helmets and accessories) and Riddell® (football equipment and reconditioning
services). Together, these brands represent the vast majority of our
net sales and are among the
most recognized in the sporting goods industry.
We sell our products through diverse channels of distribution including: (i) specialty
retailers that cater to sports enthusiasts who typically seek premium products at the highest
performance levels, (ii) national and regional full-line sporting goods retailers and distributors,
(iii) institutional buyers such as educational institutions and athletic leagues and (iv) 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 and suppliers to reduce overhead and capital
intensity generally associated with manufacturing.
We
continually monitor 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 of or seek to refinance our senior secured credit
facility or complete public or private offerings
of debt securities.
We have two reportable segments: Team Sports and Action Sports. Our Team Sports segment
primarily consists of football, baseball, softball, ice hockey 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, snow sports and powersports
and fitness related products.
23
Table of Contents
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 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 and other team sports products and
reconditioning services related to certain of these products. All of Bells activity, including the
Bell brand, the Giro brand and the Easton branded cycling products is reflected in our Action
Sports segment, which primarily consists of helmets, equipment, components and accessories for
cycling, snow sports 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 (SG&A) expenses include all operating expenses not
included in cost of sales, primarily, selling, marketing, administrative payroll, research and
development, 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.
Factors Affecting our Business
Although other factors will likely impact us, including some we do not foresee, we believe our
performance for the remainder of 2009 will be affected by the
following key factors:
| Economic Climate. The uncertain worldwide economic environment could cause the reported financial information not to be necessarily 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: lower net sales from slowing 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; and business disruptions due to difficulties experienced by suppliers and customers. |
24
Table of Contents
| 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. | ||
| ERP Implementation. We continue to plan for our long-term growth by investing in our operations management and infrastructure. In the second fiscal quarter of 2009, we substantially completed the implementation of SAPs ERP system, an enterprise-wide software platform encompassing finance, sales and distribution, manufacturing and materials management. This program replaced multiple software platforms previously used in our business operations, including legacy platforms used by our predecessor companies. We expect that the system will streamline reporting and enhance internal controls. We also expect that this enterprise-wide software solution will enable management to better and more efficiently conduct our operations and gather, analyze and assess information across all business segments and geographic locations. However, we may experience difficulties in operating our business under SAPs ERP, any of which could disrupt our operations, including our ability to timely ship and track product orders to customers, project inventory requirements, manage our supply chain and otherwise adequately service our customers. | ||
| 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 Levels. In connection with our acquisition of Easton, we entered into a senior secured credit facility providing for a $335.0 million term loan facility, a $70.0 million U.S. revolving credit facility and a Cdn $12.0 million Canadian revolving credit facility. As of October 3, 2009, the outstanding principal balance under our term loan facility was $272.1 million and we had zero outstanding under both our U.S. and Canadian revolving credit facilities. In addition, we have $140.0 million of outstanding principal amount of our senior subordinated notes due in 2012. As of July 4, 2009, we were not in compliance with the maximum total leverage ratio test as set forth in the Credit Agreement. However, this event of non-compliance was cured on August 14, 2009 through the exercise of a cure right as provided for in our the credit agreement governing our senior secured credit facility as discussed in more detail in the Liquidity and Capital Resources discussion below. | ||
| Seasonality. Our business is subject to seasonal fluctuation. Sales of cycling products, baseball and softball products and accessories occur primarily during the warm weather months. Sales of football helmets, shoulder pads 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 rise in snow sports and powersports sales which, to a certain extent, counter the cycling, baseball, softball and football seasons. |
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. 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, management evaluates estimates, including those related to reserves, intangible assets,
income taxes and contingencies. Management bases these estimates 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. A description of
critical accounting policies and related judgments and estimates that affect the preparation of the
consolidated financial statements is set forth in our Annual Report on Form 10-K dated January 3,
2009.
25
Table of Contents
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 3, | % of | September 27, | % of | |||||||||||||
2009 | Net Sales | 2008 | Net Sales | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net sales |
$ | 180.4 | 100.0 | % | $ | 203.4 | 100.0 | % | ||||||||
Cost of sales |
118.4 | 65.6 | % | 130.5 | 64.2 | % | ||||||||||
Gross profit |
62.0 | 34.4 | % | 72.9 | 35.8 | % | ||||||||||
Selling, general and administrative expenses |
40.4 | 22.4 | % | 46.1 | 22.7 | % | ||||||||||
Amortization of intangibles |
3.4 | 1.9 | % | 3.4 | 1.6 | % | ||||||||||
Income from operations |
$ | 18.2 | 10.1 | % | $ | 23.4 | 11.5 | % | ||||||||
Three Fiscal Quarters Ended | ||||||||||||||||
October 3, | % of | September 27, | % of | |||||||||||||
2009 | Net Sales | 2008 | Net Sales | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net sales |
$ | 552.5 | 100.0 | % | $ | 606.3 | 100.0 | % | ||||||||
Cost of sales |
370.0 | 67.0 | % | 391.0 | 64.5 | % | ||||||||||
Gross profit |
182.5 | 33.0 | % | 215.3 | 35.5 | % | ||||||||||
Selling, general and administrative expenses |
129.6 | 23.4 | % | 135.8 | 22.4 | % | ||||||||||
Restructuring expenses |
| | 0.5 | 0.1 | % | |||||||||||
Amortization of intangibles |
10.0 | 1.8 | % | 10.0 | 1.6 | % | ||||||||||
Income from operations |
$ | 42.9 | 7.8 | % | $ | 69.0 | 11.4 | % | ||||||||
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 3, | September 27, | Change | October 3, | September 27, | Change | |||||||||||||||||||||||||||
2009 | 2008 | $ | % | 2009 | 2008 | $ | % | |||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Team Sports |
$ | 91.2 | $ | 112.6 | $ | (21.4 | ) | (19.0 | )% | $ | 299.8 | $ | 345.8 | $ | (46.0 | ) | (13.3 | )% | ||||||||||||||
Action Sports |
89.2 | 90.8 | (1.6 | ) | (1.8 | )% | 252.7 | 260.5 | (7.8 | ) | (3.0 | )% | ||||||||||||||||||||
$ | 180.4 | $ | 203.4 | $ | (23.0 | ) | (11.3 | )% | $ | 552.5 | $ | 606.3 | $ | (53.8 | ) | (8.9 | )% | |||||||||||||||
Net sales in both Team Sports and Action Sports during the third fiscal quarter and the first
three fiscal quarters of 2009 were negatively impacted by the overall economic climate and by
unfavorable foreign currency exchange rate movements in each segment. Consumers continue to trade
down in price points and defer discretionary purchases and as a result, retailers are reluctant to
make advance purchases and continue to closely manage inventory positions.
During the third fiscal quarter of 2009, net sales in the Team Sports and Action Sports
segments were negatively impacted by unfavorable foreign currency exchange rate movements of $1.0
million and $0.6 million, respectively. On a constant currency
basis, net sales in Team Sports and
Action Sports were down $20.4 million, or 18.1% and $1.0 million, or 1.1%, respectively.
The decrease in Team Sports net sales during the quarter primarily resulted from the
decline in sales of ice hockey equipment (partially due to the foreign currency exchange rate impact on
products sold in Canada and Europe) and declines in sales of baseball and softball bats, football
equipment and collectible football helmets. Sales of football equipment were negatively impacted by
institutions scaling back purchases due to budget constraints. Action Sports net sales decreased
primarily due to lower sales of OEM cycling components due to softer demand for high end bicycles
and lower sales of licensed cycling helmets, cycling accessories and powersports helmets, partially offset by increased
sales from strong pre-season orders for snow sports helmets and sales of the recently introduced
Giro branded cycling gloves.
26
Table of Contents
For the first three fiscal quarters of 2009, net sales in both segments were negatively
impacted by unfavorable foreign currency exchange rate movements of $8.1 million and $3.5 million
in Team Sports and Action Sports, respectively. On a constant
currency basis for the first three fiscal quarters, net sales in Team Sports
and Action Sports were down $37.9 million, or 11.0% and $4.3 million, or 1.7%, respectively. The
Team Sports net sales decrease also resulted from the decline in sales of baseball and softball
equipment, hockey equipment (partially due to the foreign currency exchange rate impact on products
sold in Canada and Europe), football equipment (resulting primarily
from institutions scaling back purchases due to budget
constraints), apparel and collectible football helmets. Performance
of reconditioning services decreased slightly during the period. Action Sports net sales decreased due to lower sales of cycling helmets,
OEM cycling components, powersports helmets, eyewear and fitness related products, partially offset
by increased sales of snow sports helmets and sales of the recently introduced Giro branded cycling
gloves.
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 3, | % of | September 27, | % of | October 3, | % of | September 27, | % of | |||||||||||||||||||||||||
2009 | Net Sales | 2008 | Net Sales | 2009 | Net Sales | 2008 | Net Sales | |||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Team Sports |
$ | 56.0 | 61.4 | % | $ | 65.7 | 58.3 | % | $ | 187.7 | 62.6 | % | $ | 204.6 | 59.2 | % | ||||||||||||||||
Action Sports |
62.4 | 70.0 | % | 64.8 | 71.4 | % | 182.3 | 72.1 | % | 186.4 | 71.6 | % | ||||||||||||||||||||
$ | 118.4 | 65.6 | % | $ | 130.5 | 64.2 | % | $ | 370.0 | 67.0 | % | $ | 391.0 | 64.5 | % | |||||||||||||||||
For the third fiscal quarter and the first three fiscal quarters of 2009, the increase in Team
Sports cost of sales as a percentage of net sales primarily relates to unfavorable mix due to a
higher concentration of sales of mid and lower price point products, closeout sales of baseball and
softball equipment, the negative impact of changes in foreign currency exchange rates on hockey
products sold in Canada and Europe and higher sourced finished goods costs, partially offset by
lower sourced product costs and lower warranty costs due to reduced defective product
returns.
The decrease in Action Sports cost of sales as a percentage of net sales in the third fiscal
quarter of 2009 primarily relates to lower sourced finished goods costs, lower closeout sales of
mass channel products and inventory write-offs, partially offset by the negative impact of changes
in foreign currency exchange rates on net sales and increased defective product returns. The
increase in Action Sports cost of sales as a percentage of net sales for the first three fiscal
quarters of 2009 primarily relates to the negative impact of changes in foreign currency exchange
rates on net sales, closeout sales of snow sports helmets and inventory write-offs, partially
offset by lower royalties due to a sales decline in licensed cycling helmets.
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 3, | % of | September 27, | % of | October 3, | % of | September 27, | % of | |||||||||||||||||||||||||
2009 | Net Sales | 2008 | Net Sales | 2009 | Net Sales | 2008 | Net Sales | |||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Team Sports |
$ | 35.2 | 38.6 | % | $ | 46.9 | 41.7 | % | $ | 112.1 | 37.4 | % | $ | 141.3 | 40.8 | % | ||||||||||||||||
Action Sports |
26.8 | 30.0 | % | 26.0 | 28.6 | % | 70.4 | 27.9 | % | 74.0 | 28.4 | % | ||||||||||||||||||||
$ | 62.0 | 34.4 | % | $ | 72.9 | 35.8 | % | $ | 182.5 | 33.0 | % | $ | 215.3 | 35.5 | % | |||||||||||||||||
For the third fiscal quarter and the first three fiscal quarters of 2009, the decrease in Team
Sports gross margin primarily relates to unfavorable mix due to a higher concentration of sales of
mid and lower price point products, closeout sales of baseball and softball equipment, the negative
impact of changes in foreign currency exchange rates on hockey products sold in Canada and Europe
and higher sourced finished goods costs, partially offset by lower
sourced product costs and
lower warranty costs due to reduced defective product returns.
The increase in Action Sports gross margin in the third fiscal quarter of 2009 primarily
relates to lower sourced finished goods costs, lower closeout sales of mass channel products and
inventory write-offs, partially offset by the negative impact of changes in foreign currency
exchange rates on net sales and increased defective product returns. The decrease in Action Sports
gross margin for the first three fiscal quarters of 2009 primarily relates to the negative impact
of changes in foreign currency exchange rates on net sales, closeout sales of snow sports helmets
and inventory write-offs, partially offset by lower royalties due to a sales decline in licensed
cycling helmets.
27
Table of Contents
Selling, General and Administrative Expenses
SG&A expenses decreased $5.7 million or 12.4% for the third fiscal quarter of 2009, as
compared to the third fiscal quarter of 2008. The SG&A decrease primarily relates to lower
incentive compensation expense of $4.8 million due to the decline in our profitability and reduced
variable selling expenses of $1.6 million related to the decline
in net sales and $0.8 million related
to spending controls implemented on promotion and sponsorship
programs and lower Sarbanes Oxley compliance
costs, partially offset by $0.7 million of higher depreciation on information technology capital
expenditures and higher spending in research and development of
$0.4 million.
For the first three fiscal quarters of 2009, SG&A expenses decreased $6.2 million or 4.6%, as
compared to the first three fiscal quarters of 2008. The decrease primarily relates to lower
incentive compensation expense of $4.8 million due to the decline in profitability and reduced
variable selling expenses of $1.7 million related to the decline
in net sales, a decrease in product
liability settlement and defense costs of $3.4 million and $0.9 million related to spending
controls implemented on promotion and sponsorship programs and lower Sarbanes Oxley compliance costs,
partially offset by $1.9 million of higher depreciation on information technology capital
expenditures and higher spending for the television advertising
campaign related to the True Fit cycling helmet launch and in research and development and information technology to
implement our new SAP ERP system of $1.3 million,
$0.6 million and $0.7 million, respectively. The $3.4 million
of decreased product liability costs in the first three fiscal quarter of 2009 as compared to the
first three quarters of 2008 was primarily related to lower settlement and litigation costs.
Restructuring Expenses
Restructuring expenses decreased $0.5 million or 100%, for the first three fiscal quarters of
2009, as compared to the first three fiscal quarters of 2008. The decrease relates to the 2007
closure of the Van Nuys, California manufacturing facility, as no additional costs were incurred
during the first three fiscal quarters of 2009.
Amortization of Intangibles
Amortization of intangibles of $3.4 million and $10.0 million, was the same for the third
fiscal quarter and first three fiscal quarters of 2009 and 2008, respectively.
Interest Expense
Interest expense decreased $1.9 million or 20.1% during the third fiscal quarter of 2009, as
compared to the third fiscal quarter of 2008. The decrease was due to a $1.4 million change in the
fair value of the interest rate swap which increased the third fiscal quarter 2008 interest
expense, along with reduced debt levels in the first three quarters
of 2009. For the first three fiscal
quarters of 2009, interest expense increased $2.0 million or 9.2%, as compared to the first three
fiscal quarters of 2008. The increase was due to a $3.9 million change in the fair value of the
interest rate swap which decreased the first three fiscal quarters of 2008 interest expense,
partially offset by reduced debt levels in 2009.
Income Tax Expense
Income tax expense was $4.3 million for the third fiscal quarter of 2009, as compared to an
income tax expense of $7.6 million for the third fiscal quarter of 2008. The effective tax rate was
40.6% for the third fiscal quarter of 2009, as compared to 54.4% for the third fiscal quarter of
2008. For the third fiscal quarter of 2009, the difference between the effective rate and the
statutory rate is primarily attributable to the permanent difference for equity compensation
expense. For the third fiscal quarter of 2008, the difference between the effective rate and the
statutory rate is primarily attributable to the permanent difference for equity compensation
expense and the permanent difference for Section 956 U.S. income recognition related to Canadas
investment in U.S. property. The outstanding balance on intercompany
accounts was deemed taxable in the U.S. under Section 956 of the
Internal Revenue Code and subject to income tax in Q4 2008. There was
no Section 956 U.S. income recognition in 2009 and therefore no
effect on income tax expense in 2009.
For the first three fiscal quarters of 2009 and 2008, income tax expense was $8.1 million and
$23.1 million, respectively. The effective tax rate was 42.1% for the first three fiscal quarters
of 2009, as compared to 48.9% for the first three fiscal quarters of 2008. For the first three
fiscal quarters of 2009, the difference between the effective rate and the statutory rate is
primarily attributable to the permanent difference for equity compensation expense. For the first
three fiscal quarters of 2008, the difference between the effective rate and the statutory rate is
primarily attributable to the permanent difference for equity compensation expense and the
permanent difference for Section 956 U.S. income recognition related to Canadas investment in U.S.
property. The outstanding balance on intercompany
accounts was deemed taxable in the U.S. under Section 956 of the
Internal Revenue Code and subject to income tax in Q4 2008. There was
no Section 956 U.S. income recognition in 2009 and therefore no
effect on income tax expense in 2009.
28
Table of Contents
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 our revolving credit facilities.
The cash generated from operating activities and the availability under our Credit Agreement
(defined below) are our principal sources of liquidity. 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 our Credit Agreement will be adequate to
meet our liquidity needs for at least the next twelve months. We cannot assure 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 our Credit Agreement in an amount sufficient to enable us to repay our indebtedness,
including our senior subordinated notes, or to fund our other liquidity needs. As a result, we may
have to request relief from our lenders on occasion with respect to financial covenant compliance.
In addition, upon the occurrence of certain events, such as a change in control, we could be
required to repay or refinance our indebtedness and we cannot assure you that we will be able to
refinance any of our indebtedness on commercially reasonable terms or at all. Our ability to make
payments to fund working capital, capital expenditures, debt service and strategic acquisitions
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.
Senior Secured Credit Facility
In connection with the acquisition of Easton, we, together with RBG and certain of our
domestic and Canadian subsidiaries, entered into a senior secured Credit and Guaranty Agreement
(the Credit Agreement) with Wachovia Bank, National Association, as the administrative agent, and
a syndicate of lenders. The Credit Agreement provides for a $335.0 million term loan facility, a
$70.0 million U.S. revolving credit facility and a Cdn $12.0 million Canadian revolving credit
facility. All three facilities are scheduled to mature in
March 2012.
As of October 3, 2009, we had
$272.1 million outstanding under the term loan facility, zero outstanding under both our U.S. and
Canadian revolving credit facilities and also had availability to borrow an additional $66.4
million and Cdn $12.0 million under the U.S. revolving credit facility and Canadian revolving
credit facility, respectively. We have arrangements with our lenders as part of our Credit Agreement 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. Outstanding letters of credit
issued under the revolving credit facilities totaled $3.6 million and $3.8 million at October 3,
2009 and September 27, 2008, respectively.
The interest rates per annum applicable to the loans under our Credit Agreement, other than
swingline loans, 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 a Canadian bankers acceptance rate. Swingline loans
bear interest at a rate equal to an applicable margin percentage plus the U.S. base rate for U.S.
dollar denominated loans or the Canadian base rate for Canadian dollar denominated loans, as
applicable. The applicable margin percentage for the term loan is initially 1.75% for LIBOR and
0.75% for the U.S. base rate, which is subject to adjustment to 1.50% for LIBOR and 0.50% for the
U.S. base rate based upon our leverage ratio as calculated under the Credit Agreement. The
applicable margin percentage for the revolving loan facilities is initially 2.00% for LIBOR or
Canadian bankers acceptance rate and 1.00% for the U.S. and Canadian base rates. The applicable
margin percentage for the revolving loan facilities and swingline loan facilities varies between
2.25% and 1.50% for LIBOR or Canadian bankers acceptance rate, or between 1.25% and 0.50% for the
U.S. and Canadian base rates, based upon the leverage ratio as calculated under the Credit
Agreement.
We are the borrower under the term loan facility and U.S. revolving credit facility and our
Canadian subsidiaries are the borrowers under the Canadian revolving credit facility. Under our
Credit Agreement, RBG and certain of our domestic subsidiaries have guaranteed all of our
obligations (both U.S. and Canadian), and we and certain of our Canadian subsidiaries have
guaranteed the obligations under the Canadian revolving credit facility. Additionally, we and our
subsidiaries have granted security with respect to substantially all of our real and personal
property as collateral for our U.S. and Canadian obligations (and related guarantees) under our
Credit Agreement. Furthermore, certain of our domestic subsidiaries and certain of our other
Canadian subsidiaries have granted security with respect to substantially all of their real and
personal property as collateral for the obligations (and related guarantees) under our Canadian
revolving credit facility, and in the case of our domestic subsidiaries, the obligations (and
related guarantees) under our Credit Agreement generally.
29
Table of Contents
Our Credit Agreement imposes limitations on our ability and the ability of our subsidiaries to
incur, assume or permit to exist additional indebtedness, create or permit liens on their assets,
make investments and loans, engage in certain mergers or other fundamental changes, dispose of
assets, make distributions or pay dividends or repurchase stock, prepay subordinated debt, enter
into transactions with affiliates, engage in sale-leaseback transactions and make capital
expenditures. In addition, our Credit Agreement requires us to comply on a quarterly and annual
basis with certain financial covenants, including a maximum total leverage ratio test, a minimum
interest coverage ratio test and an annual maximum capital expenditure limit.
Our Credit Agreement contains events of default customary for such financings, including but
not limited to nonpayment of principal, interest, fees or other amounts when due; violation of
covenants; failure of any representation or warranty to be true in all material respects when made
or deemed made; cross default and cross acceleration to certain indebtedness; certain ERISA events;
change of control; dissolution, insolvency and bankruptcy events; material judgments; and actual or
asserted invalidity of the guarantees or security documents. Some of these events of default allow
for grace periods and are subject to materiality thresholds.
As of July 4, 2009, we were not in compliance with the maximum total leverage ratio test as
set forth in the Credit Agreement. However, this event of non-compliance was cured on August 14,
2009 through the exercise of a cure right as provided for in the Credit Agreement. The cure right
provides us the right to receive cash common equity infusions in an amount that is necessary to
satisfy the financial covenant tests on a pro-forma basis. The cure right capital contribution
amount is considered additional consolidated adjusted EBITDA, as defined in the Credit Agreement,
for purposes of measuring compliance with the financial covenants for our fiscal quarter ended July
4, 2009. In subsequent periods, this cure amount will continue to be considered a component of
consolidated adjusted EBITDA for the next three fiscal quarters on a trailing four quarter
calculation basis. The cure amount is limited such that it cannot exceed the amount required for
purposes of complying with the financial covenants nor can this cure right be exercised again in
the following two succeeding quarters. Additionally, the cure amount is limited in any case to a
maximum amount of $15 million in the aggregate since March 16, 2006.
The cure right cash common equity infusion necessary to cure our non-compliance with the
financial covenants tested as of July 4, 2009 was received by our Parent and EB Sports from certain
existing investors in our Parent and members of management, including Mr. Harrington, on August 14,
2009. In order to finance this common equity infusion, our Parent issued Class C Common Units and
EB Sports issued shares of Series A preferred stock to the participants of the financing, which
included certain existing investors of our Parent and Mr. Harrington. Our Parent used the proceeds
of its issuance of Class C Common Units to pay its expenses related to the financing of our cure
right and to maintain a balance for our Parents future expenses. EB Sports used a portion of the
proceeds from its issuance of Series A preferred stock to pay its expenses related to the financing
of our cure right and the balance of the proceeds was contributed to the capital of RBG, which in
turn contributed the necessary cash equity infusion, in the amount of $12.9 million, to our
capital. The $12.9 million was then used to pay down the term loan facility. As a result of the
exercise of this cure, we were in compliance with the covenants of the Credit Agreement, and we
were deemed to have satisfied the requirements of such financial covenants as of July 4, 2009.
On September 29, 2009, we made an additional payment towards the principal balance on our term
loan facility in the amount of $30,000. As of October 3, 2009, we were in compliance with all of
our covenants under our Credit Agreement.
We may not be able to continue to satisfy the financial covenant requirements in subsequent
periods. If we are unable to maintain compliance with the financial covenants contained in the
Credit Agreement, an event of default would occur. During the continuance of an event of a default,
the lenders under the Credit Agreement are entitled to take various actions, including accelerating
amounts due under the Credit Agreement, terminating our access to our revolving credit facilities
and all other actions permitted to be taken by a secured creditor. An event of default could have a
material adverse effect on our financial position, results of operations and cash flow.
Senior Subordinated Notes
In September 2004, in connection with the acquisition of Bell, we issued $140.0 million of
8.375% senior subordinated notes due October 2012 (the Notes). The Notes are general unsecured
obligations and are subordinated in right of payment to all existing or future senior indebtedness.
Interest is payable on the Notes semi-annually on April 1 and October 1 of each year. We may
currently redeem the Notes, in whole or in part, at 102.094% of the principal amount, plus accrued
interest. The redemption price declines to 100% of the principal amount, plus accrued interest, at
any time on or after October 1, 2010.
The indenture governing the Notes contains certain restrictions on us, including restrictions
on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and
engage in certain other activities. The Notes are guaranteed by all of our domestic subsidiaries.
30
Table of Contents
Sources
and Uses of Our Cash
Cash provided by operating activities was $51.6 million for the first three fiscal quarters of
2009, as compared to $61.7 million of cash provided in the first three fiscal quarters of 2008. The
decrease in cash provided by operating activities primarily reflects (i) lower net income, (ii)
lower accounts payable, (iii) lower accrued expenses due to the payment in 2009 for incentive
compensation related to fiscal year 2008 and the decrease in the accrual for incentive compensation
in fiscal year 2009 and (iv) lower deferred income taxes, partially offset by (i) incremental
inventory reductions in fiscal year 2009, (ii) the receipt of a deposit for insurance in fiscal
year 2009 and (iii) lower accounts receivable due to the decline in net sales in fiscal year 2009.
We had $299.3 million in working capital as of October 3, 2009, as compared to $282.9 million
at January 3, 2009. The $16.4 million increase in working capital primarily results from the
increase in cash, lower accounts payable and accrued expenses and the reduction of the current
portion of long-term debt, partially offset by the decrease in prepaid expenses and inventory.
Cash used in investing activities was $12.1 million for the first three fiscal quarters of
2009, as compared to $11.0 million used in the first three fiscal quarters of 2008. For both
periods, the amounts were related to the purchase of property, plant and equipment. Capital
expenditures made for both periods were primarily related to the implementation of our ERP system
and enhancing new and existing products.
Cash used in financing activities was $30.8 million for the first three fiscal quarters of
2009, as compared to $22.0 million of cash provided by financing activities in the first three
fiscal quarters of 2008. The primary reason for the difference is the $43.6 million of payments on
the term loan facility, partially offset by the $12.9 million capital contribution from our Parent
in 2009, whereas in 2008, we had net borrowings on our revolving credit facility of $24.5 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
Our net sales and expenses are predominantly denominated in U.S. dollars. In fiscal 2008,
approximately 86.1% of our net sales were in U.S. dollars, with substantially all of the remaining
sales in Canadian dollars, Taiwan dollars and Euros. 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 in Asia is finished goods rather than raw materials. As a result,
with respect to many of our products, we do not immediately experience the impact of commodity
price changes or higher manufacturing wages. Such costs are generally passed on to us only after
the vendors have experienced them for some time. However, because we generally purchase these goods
in U.S. dollars, changes in the value of the U.S. dollar can have a more 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 would 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. At October 3, 2009, there were
foreign currency forward contracts in effect for the purchase of U.S. $40.4 million aggregated
notional amounts, or approximately Cdn $43.8 million. We also had other contracts in effect for the
purchase of $0.7 million U.S. aggregated notional amounts, or approximately 0.5 million Euros and
the purchase of $0.4 million U.S. aggregated notional amounts, or approximately £0.2 million
British Pounds. 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.
31
Table of Contents
Considering both the anticipated cash flows from firm purchase commitments and anticipated
purchases for the next quarter and the foreign currency instruments in place at October 3, 2009, a
hypothetical 10% movement of the U.S. dollar relative to other currencies would not have a material
adverse affect on our expected quarterly 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 does not reflect the effect this movement may have on other
variables, including competitive risk. If it were possible to quantify this competitive impact, the
results could be different than the sensitivity effects analysis described. In addition, it is unlikely
currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some
currencies may weaken while others may strengthen. Moreover, any movement of the U.S. dollar
relative to other currencies and its impact on material 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 U.S. 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. In connection with our acquisition of Easton, we entered
into our Credit Agreement consisting of a $335.0 million term loan facility, a $70.0 million U.S.
revolving credit facility and a Cdn $12.0 million Canadian revolving credit facility. As of October
3, 2009, the outstanding principal balance under our term loan facility was $272.1 million and we
had zero outstanding under both our U.S. and Canadian revolving credit facilities. The interest
rates on the term loan and outstanding amounts under the revolving credit facilities are based on
the prime rate or LIBOR plus an applicable margin percentage.
Our Credit Agreement requires us to have interest rate agreements in place such that not less
than 50% of our outstanding term and senior subordinated indebtedness is fixed rate indebtedness.
In April 2008 we entered into an interest rate swap agreement with an initial notional amount of
$275.0 million which decreased to $250.0 million on April 15, 2009. As of October 3, 2009, with the
interest rate swap, approximately 95% of our outstanding term and senior subordinated indebtedness
was fixed rate indebtedness.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of October 3, 2009, 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 (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.
32
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are currently involved in various suits and claims, including various product liability
suits and claims, all of which constitute ordinary, routine litigation incidental to the business.
We believe that none of the claims or actions, either individually or in the aggregate, is 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 3, 2009. 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 documents are filed as part of this Form 10-Q:
The filings referenced for | ||||
Exhibit | incorporation by reference | |||
Number | Description of Exhibit | 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 |
33
Table of Contents
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 4, 2009 | /s/ Paul E. Harrington | |||
Paul E. Harrington | ||||
Chief Executive Officer and President (Principal Executive Officer) |
||||
Dated: November 4, 2009 | /s/ Mark A. Tripp | |||
Mark A. Tripp | ||||
Chief Financial Officer (Principal Financial Officer) |
||||
34