Form 10-Q American Outdoor Brands Corp

10-Q - Quarterly report [Sections 13 or 15(d)]

Published: 2019-03-07 16:16:30
Submitted: 2019-03-07
Period Ending In: 2019-01-31
aobc-10q_20190131.htm 10-Q


aobc-10q_20190131.htm

00 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2019

Commission File No. 001-31552

 

American Outdoor Brands Corporation

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

87-0543688

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2100 Roosevelt Avenue

Springfield, Massachusetts

 

01104

(Address of principal executive offices)

 

(Zip Code)

(800) 331-0852

(Registrant’s 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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

  

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had 54,557,948 shares of common stock, par value $0.001, outstanding as of March 5, 2019.

 

 


AMERICAN OUTDOOR BRANDS CORPORATION

Quarterly Report on Form 10-Q

For the Three and Nine Months Ended January 31, 2019 and 2018

 

TABLE OF CONTENTS

 

 

Smith & Wesson®, S&W®, M&P®, M&P Shield®, Performance Center®, Bodyguard®, Governor®, SW22 Victory®, T/C ®, America’s Master Gunmaker ®, Compass®, Contender®, Dimension®, Encore®, Triumph®, Weather Shield®, Caldwell®, Delta Series®, Wheeler®, Tipton®, Frankford Arsenal®, Lockdown®, BOG-POD®, Golden Rod®, Mag Charger®, Hooyman®, Schrade®, Old Timer®, Uncle Henry®, Imperial®, Non-Typical Wildlife Solutions®, Crimson Trace®, Lasergrips®, Laserguard®, Rail Master®, Shockstop®, Laserlyte®, Key Gear®, U-Dig-It®, Bubba®, Bubba Blade®, One Cut and You’re Through®, Gemtech®, G-Core®, Halo®, Integra®, World Class Silencers®, LiNQ®, Stinky Bubba®, and Turkinator™ are some of the registered U.S. trademarks of our company or one of our subsidiaries. American Outdoor Brands CorporationSM, M2.0™, SDVE™, Thompson/Center Arms™, Impact!™, Strike™, Venture™, Defender Series™, Instinctive Activation™, Master Series™, UST™, Blast Jacket™, One™, The Professional’s Choice for Decades™, and World Class Ammunition™ are some of the unregistered trademarks of our company or one of our subsidiaries. This report also may contain trademarks and trade names of other companies.

 

 


Statement Regarding Forward-Looking Information

 

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding the impact, if any, of recently issued accounting standards on our consolidated financial statements; the expected performance of acquired businesses; our assessment of factors relating to the valuation of assets acquired and liabilities assumed in acquisitions, the timing for such evaluations, and the potential adjustment in such evaluations; assessments that we make about determining segments and reporting units; the features of our outstanding debt and our expectation that our interest rate swap will not have any material effect on our earnings or our consolidated financial statements within the next 12 months; estimated amortization expense of intangible assets for future periods; the potential for impairment charges; potential repurchases of our common stock; the outcome of the lawsuits to which we are subject and their effect on us; our belief that inventory levels, both internally and in the distribution channel, in excess of demand, may negatively impact future operating results; our belief that it is difficult to forecast the potential impact of distributor inventories on future revenue and income as demand is impacted by many factors, including seasonality, new product introductions, news events, political events,  and consumer tastes; our belief that inventory levels may continue to increase due to planned inventory to reduce the risk of shipping complications at the time that our national logistics facility becomes operational; the impact of the Tax Cuts and Jobs Act, or Tax Reform, on our operating results, including our belief that Tax Reform will be a benefit to us and reduce our effective tax rate; the effects of acquisitions on our overall financial performance; our assessment of our acquisitions, including the quality and strength of their products; our assessment of consumer demand and factors that stimulate demand for our products; the effect on our business of various factors, including terrorism and the level of political pressures on firearm laws and regulations; future investments for capital expenditures; future products and product developments; the features, quality, and performance of our products; the success of particular product or marketing programs; our market share and factors that affect our market share; and liquidity and anticipated cash needs and availability. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors could cause actual results to differ materially from those indicated by the forward-looking statements. Such factors include, among other, economic, social, political, legislative, and regulatory factors; the potential for increased regulation of firearms and firearms-related products; actions of social activists that could have an adverse effect on our business; the impact of lawsuits; the demand for our products; the state of the U.S. economy in general and the firearm industry in particular; general economic conditions and consumer spending patterns; our competitive environment; the supply, availability, and costs of raw materials and components; speculation surrounding fears of terrorism and crime; our anticipated growth and growth opportunities; our ability to increase demand for our products in various markets, including consumer, law enforcement, and military channels, domestically and internationally; our penetration rates in new and existing markets; our strategies; our ability to maintain and enhance brand recognition and reputation; risks associated with the establishment of our new 632,000 square foot national logistics facility including the timing of completion and the expected benefits; our ability to introduce new products; the success of new products; our ability to expand our markets; our ability to integrate acquired businesses in a successful manner; the general growth of our outdoor products and accessories business; the potential for cancellation of orders from our backlog; and other factors detailed from time to time in our reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended April 30, 2018, filed with the SEC on June 20, 2018.

 

 

 


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

As of:

 

 

 

January 31, 2019

 

 

April 30, 2018

 

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,470

 

 

$

48,860

 

Accounts receivable, net of allowance for doubtful accounts of $1,943 on

   January 31, 2019 and $1,824 on April 30, 2018

 

 

75,493

 

 

 

56,676

 

Inventories

 

 

173,515

 

 

 

153,353

 

Prepaid expenses and other current assets

 

 

7,602

 

 

 

6,893

 

Income tax receivable

 

 

3,327

 

 

 

4,582

 

Total current assets

 

 

297,407

 

 

 

270,364

 

Property, plant, and equipment, net

 

 

185,599

 

 

 

159,125

 

Intangibles, net

 

 

97,208

 

 

 

112,760

 

Goodwill

 

 

182,101

 

 

 

191,287

 

Other assets

 

 

10,523

 

 

 

11,524

 

 

 

$

772,838

 

 

$

745,060

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

33,895

 

 

$

33,617

 

Accrued expenses and deferred revenue

 

 

37,515

 

 

 

41,632

 

Accrued payroll and incentives

 

 

16,329

 

 

 

10,514

 

Accrued income taxes

 

 

404

 

 

 

513

 

Accrued profit sharing

 

 

1,580

 

 

 

1,283

 

Accrued warranty

 

 

5,273

 

 

 

6,823

 

Current portion of notes and loans payable

 

 

6,300

 

 

 

6,300

 

Total current liabilities

 

 

101,296

 

 

 

100,682

 

Deferred income taxes

 

 

11,118

 

 

 

12,895

 

Notes and loans payable, net of current portion

 

 

175,902

 

 

 

180,304

 

Capital lease payable, net of current portion

 

 

45,580

 

 

 

22,143

 

Other non-current liabilities

 

 

6,955

 

 

 

6,888

 

Total liabilities

 

 

340,851

 

 

 

322,912

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $.001 par value, 20,000,000 shares authorized, no shares

   issued or outstanding

 

 

 

 

 

 

Common stock, $.001 par value, 100,000,000 shares authorized,

   72,715,052 issued and 54,548,190 shares outstanding on

   January 31, 2019 and 72,433,705 shares issued and 54,266,843 shares

   outstanding on April 30, 2018

 

 

73

 

 

 

72

 

Additional paid-in capital

 

 

260,212

 

 

 

253,616

 

Retained earnings

 

 

393,122

 

 

 

389,146

 

Accumulated other comprehensive income

 

 

955

 

 

 

1,689

 

Treasury stock, at cost (18,166,862 shares on January 31, 2019 and

   April 30, 2018)

 

 

(222,375

)

 

 

(222,375

)

Total stockholders’ equity

 

 

431,987

 

 

 

422,148

 

 

 

$

772,838

 

 

$

745,060

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS)/INCOME AND COMPREHENSIVE (LOSS)/INCOME

(Unaudited)

 

 

For the Three Months Ended January 31,

 

 

For the Nine Months Ended January 31,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

(In thousands, except per share data)

 

Net sales

$

162,008

 

 

$

157,376

 

 

$

462,544

 

 

$

434,825

 

Cost of sales

 

107,949

 

 

 

110,459

 

 

 

299,677

 

 

 

296,477

 

Gross profit

 

54,059

 

 

 

46,917

 

 

 

162,867

 

 

 

138,348

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

3,297

 

 

 

3,148

 

 

 

9,358

 

 

 

8,680

 

Selling and marketing

 

15,373

 

 

 

16,142

 

 

 

42,279

 

 

 

43,210

 

General and administrative

 

27,026

 

 

 

21,785

 

 

 

78,065

 

 

 

75,826

 

Goodwill impairment

 

10,396

 

 

 

 

 

 

10,396

 

 

 

 

Total operating expenses

 

56,092

 

 

 

41,075

 

 

 

140,098

 

 

 

127,716

 

Operating (loss)/income

 

(2,033

)

 

 

5,842

 

 

 

22,769

 

 

 

10,632

 

Other (expense)/income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

47

 

 

 

87

 

 

 

38

 

 

 

1,382

 

Interest expense, net

 

(2,548

)

 

 

(2,999

)

 

 

(6,822

)

 

 

(8,353

)

Total other (expense)/income, net

 

(2,501

)

 

 

(2,912

)

 

 

(6,784

)

 

 

(6,971

)

(Loss)/income from operations before income taxes

 

(4,534

)

 

 

2,930

 

 

 

15,985

 

 

 

3,661

 

Income tax expense/(benefit)

 

1,191

 

 

 

(8,465

)

 

 

7,399

 

 

 

(8,803

)

Net (loss)/income

 

(5,725

)

 

 

11,395

 

 

 

8,586

 

 

 

12,464

 

Comprehensive (loss)/income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized (loss)/income on interest rate

   swap

 

(834

)

 

 

853

 

 

 

(991

)

 

 

1,089

 

Other comprehensive (loss)/income, before income taxes

 

(834

)

 

 

853

 

 

 

(991

)

 

 

1,089

 

Income tax benefit/(expense) on other comprehensive

   loss

 

217

 

 

 

(234

)

 

 

257

 

 

 

(321

)

Other comprehensive (loss)/income, net of tax

 

(617

)

 

 

619

 

 

 

(734

)

 

 

768

 

Comprehensive (loss)/income:

$

(6,342

)

 

$

12,014

 

 

$

7,852

 

 

$

13,232

 

Net (loss)/income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.10

)

 

$

0.21

 

 

$

0.16

 

 

$

0.23

 

Diluted

$

(0.10

)

 

$

0.21

 

 

$

0.16

 

 

$

0.23

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

54,544

 

 

 

54,122

 

 

 

54,444

 

 

 

54,024

 

Diluted

 

54,544

 

 

 

54,657

 

 

 

55,132

 

 

 

54,830

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Stockholders’

 

(In thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income/(Loss)

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance at April 30, 2018

 

 

72,434

 

 

$

72

 

 

$

253,616

 

 

$

389,146

 

 

$

1,689

 

 

 

18,167

 

 

$

(222,375

)

 

$

422,148

 

Proceeds from exercise of

   employee stock options

 

 

33

 

 

 

 

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

215

 

Stock-based compensation

 

 

 

 

 

 

 

 

6,070

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,070

 

Shares issued under employee stock

   purchase plan

 

 

108

 

 

 

 

 

 

943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

943

 

Change in unrealized loss on

   interest rate swap, net of tax effect

 

 

 

 

 

 

 

 

 

 

 

(734

)

 

 

 

 

 

 

(734

)

Impact of adoption of accounting standard

   updates

 

 

 

 

 

 

 

 

(4,610

)

 

 

 

 

 

 

 

 

 

(4,610

)

Issuance of common stock under

   restricted stock unit awards, net

   of shares surrendered

 

 

140

 

 

 

1

 

 

 

(632

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(631

)

Net income

 

 

 

 

 

 

 

 

 

 

8,586

 

 

 

 

 

 

 

 

 

 

 

 

8,586

 

Balance at January 31, 2019

 

 

72,715

 

 

$

73

 

 

$

260,212

 

 

$

393,122

 

 

$

955

 

 

 

18,167

 

 

$

(222,375

)

 

$

431,987

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Nine Months Ended January 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

8,586

 

 

$

12,464

 

Adjustments to reconcile net income to net cash provided by/(used in) operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

39,624

 

 

 

38,775

 

(Loss)/gain on sale/disposition of assets

 

 

(1,033

)

 

 

36

 

Provision for losses on notes and accounts receivable

 

 

832

 

 

 

304

 

Goodwill impairment

 

 

10,396

 

 

 

Deferred income taxes

 

 

(1,519

)

 

 

(10,622

)

Change in fair value of contingent consideration

 

 

(60

)

 

 

(1,300

)

Stock-based compensation expense

 

 

6,070

 

 

 

5,764

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(19,347

)

 

 

34,103

 

Inventories

 

 

(20,186

)

 

 

(25,914

)

Prepaid expenses and other current assets

 

 

(591

)

 

 

(803

)

Income taxes

 

 

1,146

 

 

 

931

 

Accounts payable

 

 

664

 

 

 

(20,385

)

Accrued payroll and incentives

 

 

5,815

 

 

 

(11,197

)

Accrued profit sharing

 

 

297

 

 

 

(12,404

)

Accrued expenses and deferred revenue

 

 

(8,532

)

 

 

(14,667

)

Accrued warranty

 

 

(1,550

)

 

 

201

 

Other assets

 

 

10

 

 

 

(403

)

Other non-current liabilities

 

 

123

 

 

 

613

 

Net cash provided by/(used in) operating activities

 

 

20,745

 

 

 

(4,504

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(1,791

)

 

 

(23,120

)

Payments to acquire patents and software

 

 

(355

)

 

 

(384

)

Proceeds from sale of property and equipment

 

 

1,223

 

 

 

6

 

Payments to acquire property and equipment

 

 

(25,989

)

 

 

(13,956

)

Net cash used in investing activities

 

 

(26,912

)

 

 

(37,454

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from loans and notes payable

 

 

50,000

 

 

 

75,000

 

Payments on capital lease obligation

 

 

(1,025

)

 

 

(484

)

Payments on notes and loans payable

 

 

(54,725

)

 

 

(54,725

)

Proceeds from exercise of options to acquire common stock, including employee

   stock purchase plan

 

 

1,158

 

 

 

1,081

 

Payment of employee withholding tax related to restricted stock units

 

 

(631

)

 

 

(2,271

)

Net cash (used in)/provided by financing activities

 

 

(5,223

)

 

 

18,601

 

Net decrease in cash and cash equivalents

 

 

(11,390

)

 

 

(23,357

)

Cash and cash equivalents, beginning of period

 

 

48,860

 

 

 

61,549

 

Cash and cash equivalents, end of period

 

$

37,470

 

 

$

38,192

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

5,554

 

 

$

8,574

 

Income taxes

 

$

6,885

 

 

$

1,355

 

 

7


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(Unaudited)

 

Supplemental Disclosure of Non-cash Investing and Financing Activities:

 

 

 

For the Nine Months Ended January 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

 

$

1,606

 

 

$

3,453

 

Purchases of property and equipment funded by capital lease

 

 

24,271

 

 

 

11,119

 

Capital lease obligation

 

 

24,271

 

 

 

11,119

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

8


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2019 and 2018

 

(1) Organization:

We are a leading manufacturer, designer, and provider of consumer products for the shooting, hunting, and rugged outdoor enthusiast. We are one of the largest manufacturers of handguns, modern sporting rifles, and handcuffs in the United States and an active participant in the hunting rifle and suppressor markets. We are also a leading provider of shooting, hunting, and rugged outdoor products and accessories, including knives and cutting tools, sighting lasers, shooting supplies, tree saws, and survival gear. We have two reporting segments: (1) Firearms (which includes the Firearms and Manufacturing Services divisions) and (2) Outdoor Products & Accessories (which includes the Outdoor Products & Accessories and Electro-Optics divisions).

In our Firearms segment, we manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and muzzleloaders), handcuffs, suppressors, and other firearm-related products for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We sell our firearm products under the Smith & Wesson, M&P, Performance Center, Gemtech, and Thompson/Center Arms brands. We manufacture our firearm products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We perform research and development activities for our suppressors and accessories products at our facility in Meridian, Idaho. We also sell our manufacturing services to other businesses under our Smith & Wesson and Smith & Wesson Precision Components brands.

In our Outdoor Products & Accessories segment, we design, source, distribute, and manufacture reloading, gunsmithing, and gun cleaning supplies; high-quality stainless steel cutting tools and accessories; flashlights; tree saws and related trimming accessories; shooting supplies, rests, and other related accessories; fishing accessories; apparel; vault accessories; laser grips and laser sights; and a full range of products for survival and emergency preparedness. We sell our products under the Caldwell, Wheeler, Tipton, Frankford Arsenal, Smith & Wesson, M&P, Thompson/Center, Lockdown, Hooyman, BOG-POD, Golden Rod, Non-Typical Wildlife Solutions, Crimson Trace, Imperial, Schrade, Old Timer, Uncle Henry, Bubba Blade, UST, LaserLyte, and KeyGear brands. We develop and market our outdoor products and accessories at our facilities in Columbia, Missouri; Wilsonville, Oregon; and Jacksonville, Florida.

During fiscal 2018, we acquired substantially all of the net assets of Gemini Technologies, Incorporated, or Gemtech, as well as Bubba Blade branded products and other assets from Fish Tales, LLC, in two separate transactions, which we refer to collectively as the 2018 Acquisitions. See Note 4 – Acquisitions below for more information regarding these transactions.

In January 2019, we acquired substantially all of the LaserLyte branded products and other assets, or LaserLyte, from P&L Industries Inc., or P&L Industries, for a purchase price of $2.0 million, subject to certain adjustments, utilizing cash on hand. P&L Industries was a provider of laser training and sighting products for the consumer market. The operations of LaserLyte will be fully integrated into our facility located in Wilsonville, Oregon and reported in our Outdoor Products & Accessories segment. This acquisition did not have a material impact on our condensed consolidated financial statements for all periods presented.

(2) Basis of Presentation:

Interim Financial Information – The condensed consolidated balance sheet as of January 31, 2019, the condensed consolidated statements of (loss)/income and comprehensive (loss)/income for the three and nine months ended January 31, 2019 and 2018, the condensed consolidated statement of changes in stockholders’ equity for the nine months ended January 31, 2019, and the condensed consolidated statements of cash flows for the three and nine months ended January 31, 2019 and 2018 have been prepared by us without audit. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows at January 31, 2019 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2018 has been derived from our audited consolidated financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018. The results of operations for the three and nine months ended January 31, 2019 may not be indicative of the results that may be expected for the year ending April 30, 2019, or any other period.

9


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2019 and 2018

 

Revenue Recognition - We recognize revenue in accordance with the provisions of Accounting Standards Update, or ASU, Revenue from Contracts with Customers (Topic 606), which became effective for us on May 1, 2018. Generally, all performance obligations are satisfied and revenue is recognized when the risks and rewards of ownership have transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance.

In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs under which customers are entitled to receive free goods based upon their purchase of our products. The fulfillment of these free goods are our responsibility. In such instances, we allocate the revenue of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the products included in the promotional program, including the free goods. Revenue is recognized proportionally as each performance obligation is satisfied, based on the relative transaction price of each product. The net change in contract liabilities for a given period is reported as an increase or decrease to sales.

Our product sales are generally sold free on board, or FOB, shipping point and provide payment terms to most commercial customers ranging from 20 to 90 days of product shipment with a discount available to some customers for early payment. For contracts with discounted terms, the transaction price is determined upon establishment of the contract that contains the final terms of the sale, including the description, quantity, and price of each product purchased. We estimate variable consideration relative to the amount of cash discounts to which customers are likely to be entitled. In some instances, we provide longer payment terms, particularly as it relates to our hunting dating programs, which represent payment terms due in the fall for certain orders of hunting products received in the spring and summer. We do not consider these extended terms to be a significant financing component of the contract because the payment terms are less than one year. In all cases, we consider our costs related to shipping and handling to be a cost of fulfilling the contract with the customer.

Valuation of Long-lived Tangible and Intangible Assets — We evaluate the recoverability of long-lived assets, or asset groups, whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. When such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values are reduced to fair value and this adjusted carrying value becomes the asset’s new cost basis. We determine fair value primarily using future anticipated cash flows that are directly associated with and are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved.

We have significant long-lived tangible and intangible assets, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The most significant long-lived tangible and intangible assets, other than goodwill, are property, plant, and equipment, developed technology, customer relationships, patents, trademarks, and trade names. We amortize all finite-lived intangible assets either on a straight-line basis or based upon patterns in which we expect to utilize the economic benefits of such assets. We initially determine the values of intangible assets by a risk-adjusted, discounted cash flow approach. We assess the potential impairment of identifiable intangible assets and fixed assets whenever events or changes in circumstances indicate that the carrying values may not be recoverable and at least annually. Factors we consider important, which could trigger an impairment of such assets, include the following:

 

significant underperformance relative to historical or projected future operating results;

 

significant changes in the manner or use of the assets or the strategy for our overall business;

 

significant negative industry or economic trends;

 

a significant decline in our stock price for a sustained period; and

 

a decline in our market capitalization below net book value.

Future adverse changes in these or other unforeseeable factors could result in an impairment charge that could materially impact future results of operations and financial position in the reporting period identified.

In accordance with ASC 350, Intangibles-Goodwill and Other, we test goodwill for impairment on an annual basis on February 1 and between annual tests if indicators of potential impairment exist. The impairment test compares the fair value of the operating units to their carrying amounts to assess whether impairment is present. We have reviewed the provisions of ASC 350-20, with respect to the criteria necessary to evaluate the number of reporting units that exist. Based on our review of ASC 350-20, we have determined that we have three operating units: Firearms, Outdoor Products & Accessories, and Electro-Optics.

10


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2019 and 2018

 

We estimate the fair value of our Firearms, Outdoor Products & Accessories, and Electro-Optics operating units using an equal weighting of the fair values derived from the income approach and the market approach because we believe a market participant would equally weight both approaches when valuing the operating units. The income approach is based on the projected cash flows that are discounted to their present value using discount rates that consider the timing and risk of the forecasted cash flows. Fair value is estimated using internally developed forecasts and assumptions. The discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. Other significant assumptions include revenue growth rates, profitability projections, and terminal value growth rates. The market approach estimates fair values based on the determination of appropriate publicly traded market comparison companies and market multiples of revenue and earnings derived from those companies with similar operating and investment characteristics as the operating unit being valued. Finally, we compare and reconcile our overall fair value to our market capitalization in order to assess the reasonableness of the calculated fair values of our operating units. We recognize an impairment loss for goodwill if the implied fair value of goodwill is less than the carrying value.

 

A combination of factors occurring in the firearms industry during the last few years, including changes in the political environment and reduced overall demand for both firearms and the accessories that are attached to firearms, such as laser sights, has resulted in us lowering our long-range sales volume, operating profit, and cash flow forecasts in our Electro-Optics operating unit. Based on those forecasts, we felt it important to seek out efficiencies in that operating unit to increase operating performance and as a result decided to combine our Electro-Optics operating units with our Outdoor Products & Accessories operating unit. The lowered forecasts and the decision to reorganize those operating units caused us to evaluate the fair value of our operating units utilizing those forecasts. Because of that evaluation, we recorded a $10.4 million impairment of goodwill in our Electro-Optics operating unit during the three months ended January 31, 2019. This impairment was recorded in our Outdoor Products & Accessories reporting segment.

 

We evaluated our other operating units and concluded that the fair value exceeded the carrying amount. The remeasurement of goodwill is classified as a Level 3 fair value assessment as described in Note 7 - Fair Value Measurement, due to the significance of unobservable inputs developed using company-specific information.

Recently Issued Accounting Standards – In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the new standard on May 1, 2018 utilizing the modified retrospective approach. See Note 3 – Revenue Recognition and Contracts with Customers below for more information.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), or ASU 2016-02, which amends the existing guidance to require lessees to recognize lease assets and liabilities arising from operating leases in a classified balance sheet. The requirements of this ASU are effective for financial statements for annual periods beginning after December 15, 2018, and early adoption is permitted. We are in the process of implementing leasing software to assist us in the accounting and tracking of leases and plan to use the optional transition method allowed by ASU 2016-02. Under this method, the standard will be applied in the comparative period presented in the year of adoption. We plan to elect to use the package of practical expedients, which permits us to not reassess certain lease contract provisions. Although we anticipate the effect of ASU 2016-02 will result in increasing our lease assets and liabilities on our consolidated balance sheet, we are still evaluating the impact it will have on our consolidated financial statements. We plan to adopt ASU 2016-02 in our first quarter of fiscal 2020.

(3) Revenue Recognition and Contracts with Customers:

On May 1, 2018, we adopted ASU 2014-09 using the modified retrospective approach, and recorded a contract liability, included in accrued expenses in the condensed consolidated balance sheet, for outstanding performance obligations related to sales promotions. Under the modified retrospective approach, results for reporting periods after May 1, 2018 will be presented in accordance with ASU 2014-09, while prior period amounts will not be adjusted and will continue to be reported in accordance with the previous guidance, Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition. When evaluating our performance obligations, we disaggregate revenue based on major product lines, which correlate with our reportable segments disclosed in Note 12 — Segment Reporting. Also, domestic sales account for 95% of our total net sales. There are no significant judgments or estimates used in the determination of performance obligations, and the transaction price for the performance obligations are allocated on a pro-rata basis. There are no other contract costs that need to be considered based on the nature of our performance obligations.

11


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2019 and 2018

 

The following table outlines adjustments we recorded to our condensed consolidated balance sheet as a result of the adoption of ASU 2014-09 (in thousands):

 

 

 

Balance at

April 30, 2018

 

 

Accounting

Standard

Adjustments

 

 

Opening Balance

May 1, 2018

 

Accrued expenses and deferred revenue

 

$

41,632

 

 

$

(17,176

)

 

$

24,456

 

Deferred revenue from contracts with customers

 

 

 

 

23,305

 

 

 

23,305

 

Deferred income taxes

 

 

12,895

 

 

 

(1,519

)

 

 

11,376

 

Retained earnings

 

 

389,146

 

 

 

(4,610

)

 

 

384,536

 

 

At April 30, 2018, we had accrued $17.2 million of sales promotions, representing the cost of free goods earned but not yet shipped to our customers. On adoption of ASU 2014-09, we reversed this accrual and recorded deferred revenue of $23.3 million relating to these outstanding performance obligations, a deferred tax asset of $1.5 million, and a $4.6 million adjustment to reduce the opening balance of retained earnings at May 1, 2018. Deferred revenue is recorded in accrued expenses in the condensed consolidated balance sheet.

The following table outlines the impact of the adoption of ASU 2014-09 on revenue recognized during the nine-month period ended January 31, 2019 (in thousands):

 

Outstanding performance obligations with customers as of May 1, 2018

 

$

23,305

 

Revenue recognized

 

 

(13,998

)

Revenue deferred

 

 

4,314

 

Outstanding performance obligations with customers as of July 31, 2018

 

 

13,621

 

Revenue recognized

 

 

(12,337

)

Revenue deferred

 

 

7,667

 

Outstanding performance obligations with customers as of October 31, 2018

 

 

8,951

 

Revenue recognized

 

 

(10,229

)

Revenue deferred

 

 

9,064

 

Outstanding performance obligations with customers as of January 31, 2019

 

$

7,786

 

 

During the nine months ended January 31, 2019, we recognized $22.6 million of revenue previously deferred as of May 1, 2018 as the performance obligations relating to sales promotions was satisfied. In addition, we deferred $7.1 million during fiscal 2019, net of revenue recognized, as the performance obligations related to sales promotions have not been satisfied, resulting in an outstanding performance obligation liability of $7.8 million that is recorded in accrued expenses in the condensed consolidated balance sheet. During the nine months ended January 31, 2019, we recognized a $15.5 million net increase of revenue relating to the adoption of ASU 2014-09. We estimate that the majority of the revenue from the outstanding performance obligations as of January 31, 2019 will be recognized during fiscal 2019. As a result of the adoption of ASU 2014-09, for the three months ended January 31, 2019, gross margin was unfavorably impacted by 100 basis points and earnings per share was increased by $0.01, and for the nine months ended January 31, 2019, gross margin was unfavorably impacted by 600 basis points and earnings per share was increased by $0.05.

(4) Acquisitions:

 

2018 Acquisitions

In August 2017, in two separate transactions, we acquired (1) substantially all of the net assets of Gemtech and (2) Bubba Blade branded products and other assets from Fish Tales, LLC. The aggregate purchase price for the two acquisitions was $23.1 million, subject to certain adjustments, for which we utilized a combination of cash on hand and borrowings under our revolving line of credit. In connection with the Gemtech acquisition, additional consideration of up to a maximum of $17.1 million may be paid contingent upon the cumulative three-year sales volume of Gemtech products. The valuation of this contingent consideration liability was established in accordance with ASC 805 — Business Combinations. Based on current forecasted revenue, we believe it is unlikely that the acquired business will achieve the performance metrics. Therefore, as of January 31, 2019, the contingent liability was recorded at a fair value of $100,000 in non-current liabilities. Gemtech, based in Meridian, Idaho, is a provider of quality suppressors and accessories for the consumer, law enforcement, and military markets. Fish Tales, LLC, based in Oro Valley, Arizona and currently operated out of our Columbia, Missouri facility, was a provider of premium sportsmen knives and tools for fishing and hunting,

12


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2019 and 2018

 

including the premium knife brand Bubba Blade. The valuations of the assets acquired and liabilities assumed in the 2018 Acquisitions are complete. During the three months ended October 31, 2018, we increased goodwill by $618,000 due to inventory valuation adjustments.

The following table summarizes the allocation of the purchase price for the 2018 Acquisitions (in thousands):

 

 

 

2018 Acquisitions

 

 

Measurement

 

 

 

 

 

 

 

(As Initially

 

 

Period

 

 

2018 Acquisitions

 

 

 

Reported)

 

 

Adjustments

 

 

(As Adjusted)

 

Accounts receivable

 

$

846

 

 

 

(86

)

 

$

760

 

Inventories

 

 

4,683

 

 

 

(601

)

 

 

4,082

 

Other current assets

 

 

145

 

 

 

(56

)

 

 

89

 

Property, plant, and equipment

 

 

506

 

 

 

13

 

 

 

519

 

Intangibles

 

 

6,400

 

 

 

 

 

 

6,400

 

Goodwill

 

 

11,846

 

 

 

708

 

 

 

12,554

 

Total assets acquired

 

 

24,426

 

 

 

(22

)

 

 

24,404

 

Accounts payable

 

 

1,261

 

 

 

(25

)

 

 

1,236

 

Accrued payroll

 

 

49

 

 

 

(1

)

 

48

 

Other long-term liabilities

 

 

100

 

 

 

(100

)

 

 

 

Total liabilities assumed

 

 

1,410

 

 

 

(126

)

 

 

1,284

 

 

 

$

23,016

 

 

 

104

 

 

$

23,120

 

 

We amortize intangible assets in proportion to expected annual revenue generated from the intangibles that we acquire. The following are the identifiable intangible assets acquired (in thousands) in the 2018 Acquisitions and their respective weighted average lives:

 

 

 

 

 

Weighted Average

 

 

 

Amount

 

 

Life (In years)

 

Developed technology

 

$

1,700

 

 

 

5.9

 

Customer relationships

 

 

1,600

 

 

 

5.2

 

Trade names

 

 

3,100

 

 

 

5.6

 

 

 

$

6,400

 

 

 

 

 

 

Pro forma results of operations assuming that the 2018 Acquisitions had occurred as of May 1, 2016 are not required because of the immaterial impact on our consolidated financial statements for all periods presented.

(5) Goodwill and Intangible Assets:

The changes in the carrying amount of goodwill for the three and nine months ended January 31, 2019 by reporting segment are as follows:

 

 

 

 

 

 

 

Outdoor

Products &

 

 

 

 

 

 

 

Firearms

Segment

 

 

Accessories

Segment

 

 

Total

Goodwill

 

Balance as of April 30, 2018

 

$

18,490

 

 

$

172,797

 

 

$

191,287

 

Adjustments

 

 

(84

)

 

 

 

 

 

(84

)

Balance as of July 31, 2018

 

 

18,406

 

 

 

172,797

 

 

 

191,203

 

Adjustments

 

 

618

 

 

 

 

 

 

618

 

Balance as of October 31, 2018

 

 

19,024

 

 

 

172,797

 

 

 

191,821

 

Acquisitions

 

 

 

 

 

676

 

 

 

676

 

Goodwill impairment

 

 

 

 

 

(10,396

)

 

 

(10,396

)

Balance as of January 31, 2019

 

$

19,024

 

 

$

163,077

 

 

$

182,101

 

 

See Note 2 — Basis of Presentation for more detail on the goodwill impairment charge.

13


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2019 and 2018

 

 

See Note 12 — Segment Reporting for more detail on segment financial information.  

The following table presents a summary of intangible assets as of January 31, 2019 and April 30, 2018 (in thousands):

 

 

 

January 31, 2019

 

 

April 30, 2018

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer relationships

 

$

92,560

 

 

$

(35,903

)

 

$

56,657

 

 

$

92,360

 

 

$

(28,252

)

 

$

64,108

 

Developed technology

 

 

21,230

 

 

 

(12,192

)

 

 

9,038

 

 

 

21,130

 

 

 

(8,178

)

 

 

12,952

 

Patents, trademarks, and trade names

 

 

57,425

 

 

 

(26,920

)

 

 

30,505

 

 

 

56,718

 

 

 

(22,099

)

 

 

34,619

 

Backlog

 

 

1,150

 

 

 

(1,150

)

 

 

 

 

 

1,150

 

 

 

(1,150

)

 

 

 

 

 

 

172,365

 

 

 

(76,165

)

 

 

96,200

 

 

 

171,358

 

 

 

(59,679

)

 

 

111,679

 

Patents in progress

 

 

782

 

 

 

 

 

 

782