Easton-Bell’s Q4 Sales Decline in Double Digits

Easton-Bell had a difficult fourth quarter due to challenging market conditions and certain external events such as disappointing weather during the snow season, which resulted in declines that offset our growth during the first nine months of the year. Importantly, however, our underlying businesses remain strong, which can be seen by the fact that Riddell football, Easton baseball and Bell powersports all experienced market share gains and contributed significantly to the companys operating cash flow in 2012, stated Terry Lee, executive chairman and CEO of Easton-Bell.

Lee said recent leadership changes aimed at positioning Easton-Bell for long-term growth and certain litigation and inventory reserves impacted the quarters results. We are confident that we now have the right team and plan in place to grow our business and create meaningful value in 2013 and beyond, he said.

Team Sports net sales decreased $11.5 million, or 9.6 percent for the quarter as the prior year benefited from the non-recurring effects that the BBCOR bat transition and the new ten-year helmet life policy had on Easton baseball and Riddell football sales, respectively. Easton baseball and softball sales also reflect reduced pre-season orders as mass retailers right-size their inventories going into the 2013 season.

Another late winter hurts helmet sales
Action Sports net sales decreased $12.2 million, or 13.9 percent for the quarter due to the depressed global snow market effect on Giro sales, the timing of mass channel cycling product line transitions and the decision to exit the non-core fitness business, partially offset by double-digit sales growth in Giro cycling products and expanded product offerings and global distribution in Bell powersports helmets.

Margins in the fourth quarter reflect normalized sales levels for the BBCOR bat transition and football helmet life policy change, hockey skate close-outs in preparation for the upcoming Mako launch, reduced sales of Giro snow products and the write-off of Easton cycling inventory due to a design change, partially offset by product cost reduction initiatives.

Operating expenses increased $6.5 million or 11.8 percent and 690 bps as a percentage of net sales during the fourth quarter due to increased litigation expenses, higher non-cash equity compensation expense and planned investments in product innovation and sales infrastructure, partially offset by reduced incentive compensation and bad debt expense.

Results for Fiscal Year 2012
The company had net sales of $827.2 million for fiscal 2012, a decrease of 0.9 percent as compared to $834.9 million of net sales for fiscal 2011. For the year, gross margin increased by 10 bps to 34.1 percent from 34.0 percent, and Adjusted EBITDA decreased by $15.3 million or 15.5 percent to $83.0 million.

For the year, Team Sports net sales increased $7.9 million or 1.7 percent as the Riddell football market share gains and success of the Easton RS and Mako hockey stick launches were dampened by the comp for the BBCOR baseball bat transition. In spite of the effect of the BBCOR transition, our baseball bat market share increased substantially in the specialty retail channel driven by the strength of our Power Brigade bat line and the fourth quarter introduction of the 2nd generation of this highly successful family of products. Action Sports net sales decreased $15.7 million, or 4.3 percent for the year for similar reasons that affected the fourth quarter.

The margin expansion realized for the year was partially offset by the events that affected the fourth quarter, but also benefited from the double-digit sales growth in Riddell football products and Bell powersports helmets for the year. Margins through the third quarter reflected sequential improvement and were up 130 bps year-over-year.
Operating expenses increased $18.5 million or 8.7 percent and 250 bps as a percentage of net sales for the year driven by the items that affected the fourth quarter.

Adjusted EBITDA was $83.0 million for the year, a decrease of $15.3 million or 15.5 percent, from $98.2 million during the prior year. Adjusted EBITDA for the year when normalized for certain one-time litigation and inventory reserve adjustments of $8.8 million was $91.8 million and is computed as follows:

 

In addition, we note that severance expenses related to the recent leadership changes and product category exit costs of approximately $8.0 million and $2.5 million, respectively, will be reflected in the first quarter financial results for 2013. These expenses do not impact our results for 2012.

Balance Sheet Items
Net debt totaled $341.4 million (total debt of $382.3 million less cash of $40.9 million) as of Dec. 29, 2012, a decrease of $17.8 million compared to the net debt amount as of Dec. 31, 2011. Working capital as of Dec. 29, 2012 was $273.7 million (current assets of $450.9 million less current liabilities of $177.2 million) as compared to $265.9 million as of Dec. 31, 2011. The company ended the year with net inventory of $141.7 million, down 2.8 percent from a year earlier. The increase in working capital primarily results from the increase in cash, and the reduction in accounts payable and revolving credit facility borrowings, partially offset by the decrease in accounts receivable related to the sales decline and timing of payments.

The company continues to have substantial borrowing capacity and liquidity as of Dec. 29, 2012, with $181.1 million of additional borrowing availability under the revolving credit facility and liquidity of $221.9 million when including $40.9 million of cash.