The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
(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 market. 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.
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, and 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, Thompson/Center Arms, and Gemtech brands. We manufacture our firearm products at our facilities in Springfield, Massachusetts; Houlton, Maine; Eagle, Idaho; and Deep River, Connecticut. We also sell our manufacturing services to other businesses under our Smith & Wesson and Deep River Plastics 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, apparel, vault accessories, laser grips and laser sights, and a full range of products for survival and emergency preparedness. We sell our outdoor products and accessories under the following brands: Caldwell, Wheeler, Tipton, Frankford Arsenal, Smith & Wesson, M&P, Thompson/Center, Lockdown, Hooyman, BOG-POD, Golden Rod, Non-Typical, Crimson Trace, Imperial, Schrade, Old Timer, Bubba Blade, UST, and KeyGear. We develop and market our outdoor products and accessories at our facilities in Columbia, Missouri; Wilsonville, Oregon; and Jacksonville, Florida.
On August 1, 2016, we acquired substantially all of the net assets of Taylor Brands, LLC; on August 26, 2016, we acquired all of the issued and outstanding stock of Crimson Trace Corporation; and on November 18, 2016, we acquired substantially all of the net assets of Ultimate Survival Technologies, Inc., in three separate transactions, which we refer to collectively as the 2017 Acquisitions.
On August 7, 2017, we acquired substantially all of the net assets of Gemini Technologies, Incorporated, or Gemtech, and on August 11, 2017, we acquired 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 3 –
Acquisitions
for more information regarding these transactions.
(2) Basis of Presentation:
Interim Financial Information –
The condensed consolidated balance sheet as of October 31, 2017, the condensed consolidated statements of income and comprehensive income for the three and six months ended October 31, 2017 and 2016, the condensed consolidated statement of changes in stockholders’ equity for the six months ended October 31, 2017, and the condensed consolidated statements of cash flows for the six months ended October 31, 2017 and 2016 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 October 31, 2017 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2017 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, 2017. The results of operations for the three and six months ended
October 31, 2017
may
not be indicative of the results that may be expected for the year ending April 30, 2018, or any other period.
Recently Issued Accounting Standards –
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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. ASU 2014-09 is effective for interim reporting periods beginning December 15, 2017, and early adoption is permitted. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations
, which clarifies the guidance relating to principal versus agent considerations. Additionally, in April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
, which clarifies the identification of performance obligations and
9
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
(Topic 606), which provides clarifying guidance in certain na
rrow areas and adds some practical expedients. We plan to adopt the new standard on May 1, 2018 utilizing one of two acceptable methods: full retrospective adoption for all periods presented or modified retrospective adoption that presents a cumulative eff
ect as of the adoption date.
We have established an internal project team and have engaged third party specialists to assist us in evaluating the impact these ASUs will have on our condensed consolidated financial statements. We have substantially complete
d the diagnostic review of a sample of existing baseline contracts to identify potential differences that would result from applying the requirements under the new standard. As of October 31, 2017, we are in the process of evaluating the application of the
new standard and cannot at this time estimate the impact the new standard will have on our condensed consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory - Simplifying the Measurement of Inventory
(Topic 330), or ASU 2015-11, which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined other than by the last-in first-out (LIFO) method and the retail inventory method. ASU 2015-11 is effective for periods beginning after December 15, 2016, and early adoption is permitted. The new guidance must be applied prospectively. We adopted ASU 2015-11 during the three months ended July 31, 2017. The impact on our condensed consolidated financial statements was not material.
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 lease 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 have begun to review lease contract information from our subsidiaries and are currently evaluating the impact that ASU 2016-02 will have on our condensed consolidated financial statements.
(3) Acquisitions:
2018 Acquisitions
In August 2017, in two separate transactions, we acquired substantially all of the net assets of Gemtech and we acquired Bubba Blade branded products and other assets from Fish Tales, LLC for an aggregate purchase price of $23.0 million, subject to certain adjustments, utilizing 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 projections, we believe it is unlikely that the acquired business will achieve the performance metrics. Therefore, as of October 31, 2017, the contingent liability was recorded at a fair value of $100,000 in non-current liabilities. Gemtech, based in Eagle, 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, was a provider of premium sportsman knives and tools for fishing and hunting, including the premium knife brand Bubba Blade. The Gemtech business will be fully integrated into our Firearms segment and Bubba Blade branded products will be fully integrated into our Outdoor Products & Accessories segment. Therefore, we will not provide discrete financial information for the 2018 Acquisitions in the future.
We are in the process of finalizing the valuations of the assets acquired and liabilities assumed in the 2018 Acquisitions. Therefore, the fair values for these acquisitions are subject to further adjustments as we obtain additional information during the respective measurement periods, which will not exceed 12 months from the date of each acquisition. The 2018 Acquisitions will necessitate the use of this measurement period to adequately analyze and assess a number of factors used in establishing the asset and liability fair values as of each acquisition date, including the significant contractual and operational factors underlying the trade name, developed technology, and customer relationship intangible assets.
10
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
The following table summarizes the estimated preliminary allocation of the purchase price for the 2018 Acquisitions (in thousands):
|
|
|
|
|
|
|
During the Three Months Ended
|
|
|
|
October 31, 2017
|
|
Accounts receivable
|
|
$
|
846
|
|
Inventories
|
|
|
4,683
|
|
Other current assets
|
|
|
145
|
|
Property, plant, and equipment
|
|
|
506
|
|
Intangibles
|
|
|
6,400
|
|
Goodwill
|
|
|
11,846
|
|
Total assets acquired
|
|
|
24,426
|
|
Accounts payable
|
|
|
1,261
|
|
Accrued payroll
|
|
|
49
|
|
Other long term liabilities
|
|
|
100
|
|
Total liabilities assumed
|
|
|
1,410
|
|
|
|
$
|
23,016
|
|
Included in general and administrative costs are $259,000 and $676,000 of acquisition-related costs incurred during the three and six months ended October 31, 2017, respectively, related to the 2018 Acquisitions.
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 May 1, 2016 are not required because of the immaterial impact on our consolidated financial statements for all periods presented.
2017 Acquisitions
In fiscal 2017, in three separate transactions, we acquired substantially all of the net assets of Taylor Brands, LLC (now referred to as BTI Tools, LLC) and Ultimate Survival Technologies, Inc. (now referred to as Ultimate Survival Technologies, LLC, or UST,) as well as all of the issued and outstanding stock of Crimson Trace Corporation for an aggregate purchase price of $211.1 million, net of cash acquired, subject to certain adjustments, utilizing cash on hand. In connection with the purchase of UST, up to an additional $2.0 million may be paid over a period of two years, contingent upon the financial performance of the acquired business. The valuation of this contingent consideration liability was established in accordance with ASC 805 —
Business Combinations
. The initial fair value of this contingent consideration liability was $1.7 million. Based on the current forecasted revenue projections, during the six months ended October 31, 2017, we recorded a $1.3 million reduction in the fair value of this contingent consideration liability because we do not expect that the acquired business will achieve the performance metrics. This reduction was recorded in other income on the condensed consolidated statements of income. As of October 31, 2017, the fair value of this contingent liability was $400,000, which was recorded as a non-current liability.
We have substantially completed the valuation of the assets acquired and liabilities assumed related to the 2017 Acquisitions. During the six months ended October 31, 2017, we increased goodwill by $10.2 million, primarily as a result of changes to the valuation of customer relationship intangible assets and the impact to the value of the related deferred tax liabilities relating to the 2017 Acquisitions. As a result, we reduced amortization expense by $776,000, net of tax, during the three months ended October 31, 2017 relating to these changes.
11
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
The following table summarizes the allocation of the purchase price for the 2017 Acquisitions (in thousands):
|
|
2017 Acquisitions
|
|
|
Measurement
|
|
|
|
|
|
|
|
(As Initially
|
|
|
Period
|
|
|
2017 Acquisitions
|
|
|
|
Reported)
|
|
|
Adjustments
|
|
|
(As Adjusted)
|
|
Accounts receivable
|
|
$
|
11,635
|
|
|
$
|
(200
|
)
|
|
$
|
11,435
|
|
Inventories
|
|
|
31,269
|
|
|
|
453
|
|
|
|
31,722
|
|
Income tax receivable
|
|
|
—
|
|
|
|
68
|
|
|
|
68
|
|
Other current assets
|
|
|
430
|
|
|
|
(132
|
)
|
|
|
298
|
|
Property, plant, and equipment
|
|
|
8,232
|
|
|
|
—
|
|
|
|
8,232
|
|
Intangibles
|
|
|
97,850
|
|
|
|
(14,500
|
)
|
|
|
83,350
|
|
Goodwill
|
|
|
92,801
|
|
|
|
10,096
|
|
|
|
102,897
|
|
Total assets acquired
|
|
|
242,217
|
|
|
|
(4,215
|
)
|
|
|
238,002
|
|
Accounts payable
|
|
|
6,214
|
|
|
|
18
|
|
|
|
6,232
|
|
Accrued expenses
|
|
|
973
|
|
|
|
158
|
|
|
|
1,131
|
|
Accrued payroll
|
|
|
1,500
|
|
|
|
(72
|
)
|
|
|
1,428
|
|
Accrued income taxes
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
—
|
|
Accrued warranty
|
|
|
98
|
|
|
|
96
|
|
|
|
194
|
|
Deferred income taxes
|
|
|
20,658
|
|
|
|
(4,409
|
)
|
|
|
16,249
|
|
Total liabilities assumed
|
|
|
29,449
|
|
|
|
(4,215
|
)
|
|
|
25,234
|
|
|
|
$
|
212,768
|
|
|
$
|
—
|
|
|
$
|
212,768
|
|
Included in general and administrative costs are $1.8 million and $3.2 million of acquisition-related costs for the 2017 Acquisitions incurred during the three and six months ended October 31, 2016, respectively. The 2017 Acquisitions generated revenue of $27.1 million and $42.6 million for the three and six months ended October 31, 2017, respectively.
We amortize intangible assets in proportion to expected yearly revenue generated from the intangibles that we acquire. We amortize order backlog over the estimated life during which the backlog is fulfilled. The following are the identifiable intangible assets acquired (in thousands) in the 2017 Acquisitions and their respective weighted average lives:
|
|
|
|
Weighted Average
|
|
|
|
Amount
|
|
|
Life (In years)
|
|
Developed technology
|
|
$
|
3,000
|
|
|
|
4.1
|
|
Customer relationships
|
|
|
62,100
|
|
|
|
5.0
|
|
Trade names
|
|
|
17,000
|
|
|
|
4.8
|
|
Order backlog
|
|
|
1,150
|
|
|
|
0.3
|
|
Non-competition agreement
|
|
|
100
|
|
|
|
3.4
|
|
|
|
$
|
83,350
|
|
|
|
|
|
The following table reflects the unaudited pro forma results of operations assuming that the 2017 Acquisitions had occurred on May 1, 2015 (in thousands, except per share data):
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
October 31, 2016
|
|
|
October 31, 2016
|
|
Net sales
|
|
$
|
241,021
|
|
|
$
|
470,114
|
|
Income from operations
|
|
|
55,045
|
|
|
|
106,533
|
|
Net income per share - diluted
|
|
|
0.63
|
|
|
|
1.26
|
|
The unaudited pro forma income from operations for the three and six months ended October 31, 2016 has been adjusted to reflect increased cost of goods sold from the fair value step-up in inventory, which is expensed over the first inventory cycle, and the amortization of intangibles and order backlog recorded as if the 2017 Acquisitions had occurred on May 1, 2015. The unaudited pro
12
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
forma results are presented for informational purposes only and are not necessarily indicative of the actual results that would have been achieved had the 2017 Acquisitions occurred as of May 1, 2015 or the results that may be achieved in future periods
.
(
4) Goodwill:
The changes in the carrying amount of goodwill for the three and six months ended October 31, 2017 by reporting segment are as follows:
|
|
Firearms
|
|
|
Outdoor Products &
|
|
|
Total
|
|
|
|
Segment
|
|
|
Accessories Segment
|
|
|
Goodwill
|
|
Balance as of April 30, 2017
|
|
$
|
13,770
|
|
|
$
|
155,247
|
|
|
$
|
169,017
|
|
Adjustments
|
|
|
—
|
|
|
|
83
|
|
|
|
83
|
|
Balance as of July 31, 2017
|
|
|
13,770
|
|
|
|
155,330
|
|
|
|
169,100
|
|
Adjustments
|
|
|
—
|
|
|
|
10,152
|
|
|
|
10,152
|
|
Acquisitions
|
|
|
4,619
|
|
|
|
7,227
|
|
|
|
11,846
|
|
Balance as of October 31, 2017
|
|
$
|
18,389
|
|
|
$
|
172,709
|
|
|
$
|
191,098
|
|
Refer to Note 11 —
Segment Information
below for more detail.
(5) Notes and Loans Payable:
Credit Facilities
– On June 15, 2015, we and certain of our domestic subsidiaries entered into an unsecured credit facility, or the Credit Agreement, with TD Bank, N.A. and other lenders, or the Lenders, which included a $175.0 million revolving line of credit, or the Revolving Line, and a $105.0 million term loan, or the Term Loan, of which $90.8 million was outstanding as of October 31, 2017. The Revolving Line provides for availability until October 27, 2021 for general corporate purposes, with borrowings to bear interest at a variable rate equal to LIBOR or prime plus an applicable margin based on our consolidated leverage ratio, at our election. We incurred $1.0 million of debt issuance costs related to the Credit Agreement, which are included in notes and loans payable in the accompanying condensed consolidated balance sheet. On October 27, 2016, we entered into a second amendment to the Credit Agreement, or the Second Amendment, with the Lenders. Among other things, the Second Amendment increased the Revolving Line to $350.0 million, increased the option to expand the credit commitment to an additional $150.0 million, and extended the maturity of the Revolving Line from June 15, 2020 to October 27, 2021. Other than the changes described in the Second Amendment, we otherwise remain subject to the terms of the Credit Agreement, as described below. We incurred $525,000 of debt issuance costs related to this amendment and have recorded these costs in notes and loans payable in the condensed consolidated balance sheet.
As of October 31, 2017, we had $125.0 million of borrowings outstanding on the Revolving Line, which bore interest at 2.99%, equal to the LIBOR rate plus an applicable margin. The Term Loan, which bears interest at a variable rate, requires principal payments of $6.3 million per annum plus interest, payable quarterly. Any remaining outstanding amount on the maturity date of June 15, 2020 for the Term Loan will be due in full.
We were required to obtain fixed interest rate protection on the Term Loan covering not less than 75% of the aggregate outstanding principal balance of the Term Loan. Accordingly, on June 18, 2015, we entered into an interest rate swap agreement, which expires on June 15, 2020, that covered 100% of the $105.0 million of floating rate debt. On July 6, 2015, we executed an interest rate swap pursuant to such agreement, which requires us to pay interest at a defined rate of 1.56% while receiving interest at a defined variable rate of one-month LIBOR (0.188%). This swap, when combined with the applicable margin based on our consolidated leverage ratio, effectively fixed our interest rate on the Term Loan, which is subject to change based on changes in our consolidated leverage ratio. As of October 31, 2017, our interest rate on the Term Loan was 3.31%.
As of October 31, 2017, the interest rate swap was considered effective and had no effect on earnings. The fair value of the interest rate swap on October 31, 2017 was an asset of $808,000 and was included in other assets on our condensed consolidated balance sheet. We do not expect the interest rate swap to have any material effect on earnings within the next 12 months.
5.000% Senior Notes
– During fiscal 2015, we issued an aggregate of $75.0 million of 5.000% Senior Notes due 2018, or the 5.000% Senior Notes, to various institutional investors pursuant to the terms and conditions of an indenture, or the 5.000% Senior Notes Indenture, and purchase agreements. The 5.000% Senior Notes bear interest at a rate of 5.000% per annum payable on
13
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
January 15 and July 15 of each year, beginning on January 15, 2015. We incurred $2.3 million of debt issuance costs related
to the issuance of the 5.000% Senior Notes.
On and after July 15, 2017, we may, at our option, upon not less than 30 nor more than 60 days’ prior notice, redeem all or a portion of the 5.000% Senior Notes at a redemption price of 100% of the principal amount of the 5.000% Senior Notes to be redeemed plus accrued and unpaid interest as of the applicable redemption date. Subject to certain restrictions and conditions, we may be required to make an offer to repurchase the 5.000% Senior Notes from the holders of the 5.000% Senior Notes in connection with a change of control or disposition of assets. If not redeemed by us or repaid pursuant to the holders’ right to require repurchase, the 5.000% Senior Notes mature on July 15, 2018.
The 5.000% Senior Notes are general, unsecured obligations of our company. The 5.000% Senior Notes Indenture contains certain affirmative and negative covenants, including limitations on restricted payments (such as share repurchases, dividends, and early payment of indebtedness), limitations on indebtedness, limitations on the sale of assets, and limitations on liens. Payments that would otherwise be characterized as restricted payments are permitted under the 5.000% Senior Notes Indenture in an amount not to exceed 50% of our consolidated net income for the period from the issue date to the date of the restricted payment, provided that at the time of making such payments, (a) no default has occurred or would result from the making of such payments, and (b) we are able to satisfy the debt incurrence test under the 5.000% Senior Notes Indenture, or the 5.000% Senior Notes Lifetime Aggregate Limit. In addition, the 5.000% Senior Notes Indenture provides for other exceptions to the restricted payments covenant, each of which are independent of the 5.000% Senior Notes Lifetime Aggregate Limit. Among such exceptions are (i) the ability to make share repurchases each fiscal year in an amount not to exceed the lesser of (A) $50.0 million in any fiscal year or (B) 75.0% of our consolidated net income for the previous four consecutive published fiscal quarters prior to the date of the determination of such consolidated net income, and (ii) share repurchases over the life of the 5.000% Senior Notes in an aggregate amount not to exceed $75.0 million.
The limitation on indebtedness in the 5.000% Senior Notes Indenture is only applicable at such time that the consolidated coverage ratio (as set forth in the 5.000% Senior Notes Indenture) for us and our restricted subsidiaries is less than 3.00 to 1.00. In general, as set forth in the 5.000% Senior Notes Indenture, the consolidated coverage ratio is determined by comparing our prior four quarters’ consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) to our consolidated interest expense.
The carrying value of our 5.000% Senior Notes as of October 31, 2017 approximates fair value in considering Level 2 inputs within the hierarchy.
The Credit Agreement for our credit facility contains financial covenants relating to maintaining maximum leverage and minimum debt service coverage. The 5.000% Senior Notes Indenture contains a financial covenant relating to times interest earned.
Letters of Credit
– At October 31, 2017, we had outstanding letters of credit under our credit facility aggregating $1.0 million.
(6) Fair Value Measurement:
We follow the provisions of ASC 820-10,
Fair Value Measurements and Disclosures Topic
, or ASC 820-10, for our financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
Financial assets and liabilities recorded on the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1
— Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities).
Our cash and cash equivalents, which are measured at fair value on a recurring basis, totaled $68.2 million and $61.5 million as of October 31, 2017 and April 30, 2017, respectively. We utilized Level 1 of the value hierarchy to determine the fair values of these assets.
14
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
Level 2
— Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted pri
ces of instruments with similar attributes in active markets. Level 2 inputs include the following:
•
|
quoted prices for identical or similar assets or liabilities in non-active markets (such as corporate and municipal bonds that trade infrequently);
|
•
|
inputs other than quoted prices that are observable for substantially the full term of the asset or liability (such as interest rate and currency swaps); and
|
•
|
inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (such as certain securities and derivatives).
|
The carrying value of our Term Loan approximated the fair value as of October 31, 2017, in considering Level 2 inputs within the hierarchy. The fair value of our 5.000% Senior Notes as of October 31, 2017 approximated the carrying value in considering Level 2 inputs within the hierarchy as the Senior Notes are not frequently traded. The fair value of the interest rate swap was estimated by a third party using inputs that are observable or that can be corroborated by observable market data, such as interest rate yield curves, and, therefore, is classified within Level 2 of the valuation hierarchy. For more information regarding the interest rate swap, refer to Note 5 —
Notes and Loans Payable
.
Level 3
— Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our assumptions about the assumptions a market participant would use in pricing the asset or liability.
The acquisition-related contingent consideration liability represents the estimated fair value of additional future earn-outs payable for acquisitions of businesses that included earn-out clauses. The valuation of the contingent consideration will be evaluated on an ongoing basis and is based on management estimates and entity-specific assumptions which are considered Level 3 inputs.
In connection with the purchase of UST, up to an additional $2.0 million may be paid over a period of two years, contingent upon the financial performance of the acquired business. The valuation of this contingent consideration liability was established in accordance with ASC 805 —
Business Combinations
. The initial fair value of this contingent consideration liability was $1.7 million. Based on the current forecasted revenue projections, during the six months ended October 31, 2017, we recorded a $1.3 million reduction in the fair value of this contingent consideration liability because we do not expect that the acquired business will achieve the performance metrics. This reduction was recorded in other income on the condensed consolidated statements of income. As of October 31, 2017, the fair value of this contingent liability was $400,000, which was recorded as a non-current liability.
In connection with the Gemtech acquisition, up to a maximum of $17.1 million may be paid contingent upon the cumulative three year sales volume of the acquired business. The valuation of this contingent consideration liability was established in accordance with ASC 805 —
Business Combinations
. Based on current forecasted revenue projections, we believe it is unlikely that the acquired business will achieve the performance metrics. Therefore, as of October 31, 2017, the contingent liability was recorded at a fair value of $100,000 in non-current liabilities
.
(7) Inventories:
The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or net realizable value, as of October 31, 2017 and April 30, 2017 (in thousands):
|
|
October 31, 2017
|
|
|
April 30, 2017
|
|
Finished goods (a)
|
|
$
|
111,428
|
|
|
$
|
61,080
|
|
Finished parts
|
|
|
46,371
|
|
|
|
51,177
|
|
Work in process
|
|
|
8,057
|
|
|
|
9,379
|
|
Raw material
|
|
|
13,090
|
|
|
|
10,046
|
|
Total inventories
|
|
$
|
178,946
|
|
|
$
|
131,682
|
|
(a) The increase in finished goods inventory was primarily related to our Firearms segment.
15
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
(8) Intangible Assets:
The following table presents a summary of intangible assets as of October 31, 2017 and April 30, 2017 (in thousands):
|
|
October 31, 2017
|
|
|
April 30, 2017
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Customer relationships
|
|
$
|
92,360
|
|
|
$
|
(21,843
|
)
|
|
$
|
70,517
|
|
|
$
|
105,260
|
|
|
$
|
(16,463
|
)
|
|
$
|
88,797
|
|
Developed technology
|
|
|
21,130
|
|
|
|
(6,696
|
)
|
|
|
14,434
|
|
|
|
19,430
|
|
|
|
(5,436
|
)
|
|
|
13,994
|
|
Patents, trademarks, and trade names
|
|
|
56,640
|
|
|
|
(19,031
|
)
|
|
|
37,609
|
|
|
|
53,308
|
|
|
|
(15,619
|
)
|
|
|
37,689
|
|
Backlog
|
|
|
1,150
|
|
|
|
(1,150
|
)
|
|
|
—
|
|
|
|
1,150
|
|
|
|
(1,150
|
)
|
|
|
—
|
|
|
|
|
171,280
|
|
|
|
(48,720
|
)
|
|
|
122,560
|
|
|
|
179,148
|
|
|
|
(38,668
|
)
|
|
|
140,480
|
|
Patents in progress
|
|
|
633
|
|
|
|
—
|
|
|
|
633
|
|
|
|
611
|
|
|
|
—
|
|
|
|
611
|
|
Total definite-lived intangible assets
|
|
|
171,913
|
|
|
|
(48,720
|
)
|
|
|
123,193
|
|
|
|
179,759
|
|
|
|
(38,668
|
)
|
|
|
141,091
|
|
Indefinite-lived intangible assets
|
|
|
226
|
|
|
|
—
|
|
|
|
226
|
|
|
|
226
|
|
|
|
—
|
|
|
|
226
|
|
Total intangible assets
|
|
$
|
172,139
|
|
|
$
|
(48,720
|
)
|
|
$
|
123,419
|
|
|
$
|
179,985
|
|
|
$
|
(38,668
|
)
|
|
$
|
141,317
|
|
We amortize intangible assets with determinable lives over a weighted-average period of approximately five years. The weighted-average periods of amortization by intangible asset class is approximately five years for customer relationships, six years for developed technology, and five years for patents, trademarks, and trade names. Amortization expense, excluding amortization of deferred financing costs, amounted to $4.3 million and $5.6 million for the three months ended October 31, 2017 and 2016, respectively. Amortization expense, excluding amortization of deferred financing costs, amounted to $10.1 million and $8.3 million for the six months ended October 31, 2017 and 2016, respectively.
Estimated amortization expense of intangible assets for the remainder of fiscal 2018 and succeeding fiscal years is as follows:
Fiscal
|
|
Amount
|
|
2018
|
|
$
|
10,955
|
|
2019
|
|
|
21,967
|
|
2020
|
|
|
19,092
|
|
2021
|
|
|
16,484
|
|
2022
|
|
|
14,104
|
|
Thereafter
|
|
|
39,958
|
|
Total
|
|
$
|
122,560
|
|
On an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired, we evaluate the fair value of the definite and indefinite-lived intangible assets to determine if an impairment charge is required. We performed our most recent annual impairment review as of February 1, 2017. Other than the reduction in the fair value of the contingent consideration liability discussed above, there were no events or changes in circumstances that would indicate the fair value of intangible assets was reduced to below its carrying value during the six months ended October 31, 2017, and therefore intangible assets were not tested for impairment.
(9) Stockholders’ Equity:
Treasury Stock
During fiscal 2017, our board of directors authorized the repurchase of up to $50.0 million of our common stock, subject to certain conditions, in the open market or in privately negotiated transactions until March 28, 2019. This share repurchase authorization is similar to the $50.0 million authorization from June 2015 under which we repurchased 2.6 million shares of common stock for $50.0 million in fiscal 2017. As of October 31, 2017, there were no share repurchases under this stock repurchase program.
16
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
Earnings per Share
The following table provides a reconciliation of the net income amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the three and six months ended October 31, 2017 and 2016 (in thousands, except per share data):
|
For the Three Months Ended October 31,
|
|
|
2017
|
|
|
2016
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
Basic earnings
|
$
|
|
3,234
|
|
|
|
54,044
|
|
|
$
|
|
0.06
|
|
|
$
|
|
32,483
|
|
|
|
56,231
|
|
|
$
|
|
0.58
|
|
Effect of dilutive stock awards
|
|
—
|
|
|
|
612
|
|
|
|
—
|
|
|
|
—
|
|
|
|
905
|
|
|
|
|
(0.01
|
)
|
Diluted earnings
|
$
|
|
3,234
|
|
|
|
54,656
|
|
|
$
|
|
0.06
|
|
|
$
|
|
32,483
|
|
|
|
57,136
|
|
|
$
|
|
0.57
|
|
|
For the Six Months Ended October 31,
|
|
|
2017
|
|
|
2016
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
Basic earnings
|
$
|
|
1,067
|
|
|
|
53,975
|
|
|
$
|
|
0.02
|
|
|
$
|
|
67,706
|
|
|
|
56,140
|
|
|
$
|
|
1.21
|
|
Effect of dilutive stock awards
|
|
—
|
|
|
|
825
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,005
|
|
|
|
|
(0.03
|
)
|
Diluted earnings
|
$
|
|
1,067
|
|
|
|
54,800
|
|
|
$
|
|
0.02
|
|
|
$
|
|
67,706
|
|
|
|
57,145
|
|
|
$
|
|
1.18
|
|
All of our outstanding stock options and restricted stock units, or RSUs, were included in the computation of diluted earnings per share for the three and six months ended October 31, 2017 and 2016. For the three and six months ended October 31, 2017, there were 24,359 and 14,023 shares, respectively, of common stock issuable upon the exercise of stock options and under our 2011 Employee Stock Purchase Plan, or ESPP, that were excluded from the computation of diluted earnings per share because the effect would be antidilutive.
Incentive Stock and Employee Stock Purchase Plans
We have two incentive stock plans: the 2004 Incentive Stock Plan and the 2013 Incentive Stock Plan. New grants under the 2004 Incentive Stock Plan have not been made since the approval of the 2013 Incentive Stock Plan at our September 23, 2013 annual meeting of stockholders. All new grants covering all participants are issued under the 2013 Incentive Stock Plan. Except in specific circumstances, grants vest over a period of three or four years and stock options are exercisable for a period of 10 years from the date of grant. The plan also permits the grant of awards to non-employees, which our board of directors has authorized in the past.
17
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
The number of shares and weighted average exercise
prices of stock options for the six months ended October 31, 2017 and 2016 were as follows:
|
For the Six Months Ended October 31,
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
Options outstanding, beginning of year
|
|
335,160
|
|
|
$
|
6.58
|
|
|
|
389,360
|
|
|
$
|
6.16
|
|
Exercised during the period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Options outstanding, end of period
|
|
335,160
|
|
|
$
|
6.58
|
|
|
|
389,360
|
|
|
$
|
6.16
|
|
Weighted average remaining contractual life
|
3.51 years
|
|
|
|
|
|
|
4.53 years
|
|
|
|
|
|
Options exercisable, end of period
|
|
335,160
|
|
|
$
|
6.58
|
|
|
|
389,360
|
|
|
$
|
6.16
|
|
Weighted average remaining contractual life
|
3.51 years
|
|
|
|
|
|
|
4.53 years
|
|
|
|
|
|
The aggregate intrinsic value of outstanding and exercisable stock options as of October 31, 2017 and 2016 was $2.6 million and $7.9 million, respectively. There were no stock options exercised for the six months ended October 31, 2017 and 2016. At October 31, 2017, there were no unrecognized compensation costs of outstanding stock options.
On September 26, 2011, our stockholders approved our ESPP. Under the ESPP, each participant is granted an option to purchase our common stock on each subsequent exercise date during the offering period (as such terms are defined in the ESPP) in accordance with the terms of the ESPP. The option to purchase shares is exercised automatically unless the participant withdraws from the plan in accordance with the terms of the ESPP or the participant’s employment is terminated. Neither plan contributions credited to a participant’s account nor any rights to exercise any option or receive shares of common stock may be assigned, transferred, pledged, or otherwise disposed of other than by will or the laws of descent and distribution. In the event of certain corporate transactions, each option outstanding under our ESPP will be assumed or an equivalent option will be substituted by the successor corporation or a parent or subsidiary of such successor corporation.
We measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. We calculate the fair value of our stock options issued to employees using the Black-Scholes model at the time the options are granted. That amount is then amortized over the vesting period of the option. With our ESPP, fair value is determined at the beginning of the purchase period and amortized over the term of each exercise period. During the six months ended October 31, 2017 and 2016, 81,643 and 66,812 shares were purchased under our ESPP, respectively.
We estimate expected volatility using historical volatility for the expected term. The fair value of each stock option or ESPP purchase was estimated on the date of grant using the Black-Scholes option pricing model (using the risk-free interest rate, expected term, expected volatility, and dividend yield variables). The total stock-based compensation expense, including stock options, purchases under our ESPP, RSUs, and performance-based RSUs, or PSUs, was $4.2 million and $3.9 million for the six months ended October 31, 2017 and 2016, respectively. Stock-based compensation expense is included in cost of sales, sales and marketing, research and development, and general and administrative expenses.
We grant service-based RSUs to employees, consultants, and directors. The awards are made at no cost to the recipient. An RSU represents the right to acquire one share of our common stock and does not carry voting or dividend rights. Except in specific circumstances, RSU grants to employees generally vest over a period of three or four years with one-third or one-fourth of the units vesting, respectively, on each anniversary of the grant date. We amortize the aggregate fair value of our RSU grants to compensation expense over the vesting period.
We grant PSUs to our executive officers and our employees who are not executive officers. At the time of grant, we calculate the fair value of our PSUs using the Monte-Carlo simulation, using the risk-free interest rate, expected volatility, the correlation coefficient utilizing the same historical price data used to develop the volatility assumptions and dividend yield variables.
The PSUs vest, and the fair value of such PSUs will be recognized, over the corresponding three-year performance period. Our PSUs have a maximum aggregate award potential equal to 200% of the target amount granted. Generally, the number of PSUs that may be earned depends upon the total stockholder return, or TSR, of our common stock compared with the TSR of the Russell 2000 Index, or RUT, over the three-year performance period. For PSUs, our stock must outperform the RUT by 5% in order for the target
18
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
award to vest. In addition, there is a cap on the number of shares that can be earned under our PSUs, which is equal to six times the grant-date value of each award.
In certain circumstances the vested awards will be delivered on the first anniversary of the applicable vesting date. We have applied a discount to the grant date fair value when determining the amount of compensation expense to be recorded for these RSUs and PSUs.
During the six months ended October 31, 2017, we granted an aggregate of 220,872 service-based RSUs, including 177,560 to non-executive officer employees and 43,312 to our directors. In addition, in connection with a 2014 grant of 105,500 PSUs (i.e., the target amount granted), which achieved 115.2% of the targeted award, we vested and delivered awards totaling 121,504 shares to certain of our executive officers. Compensation expense recognized related to grants of RSUs and PSUs was $3.8 million for the six months ended October 31, 2017. We delivered common stock to our employees, including our executive officers during the six months ended October 31, 2017 under vested RSUs and PSUs with a total market value of $5.9 million.
During the six months ended October 31, 2016, we granted an aggregate of 225,634 service-based RSUs, including 170,738 RSUs to non-executive officer employees; 24,896 RSUs to our directors; and 30,000 RSU’s to a newly hired executive officer. In addition, in connection with a 2013 grant of 118,500 PSUs (i.e. the target amount granted), which achieved 200.0% of the targeted award, or the maximum award possible, we vested and delivered awards totaling 237,000 shares to certain of our executive officers. Compensation expense recognized related to grants of RSUs and PSUs was $3.6 million for the six months ended October 31, 2016. During the six months ended October 31, 2016, we cancelled 15,006 service-based RSUs as a result of the service condition not being met. We delivered common stock to our employees, including our executive officers, during the six months ended October 31, 2016 under vested RSUs and PSUs with a total market value of $10.2 million.
A summary of activity in unvested RSUs and PSUs for the six months ended October 31, 2017 and 2016 is as follows:
|
|
For the Six Months Ended October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
Total # of
|
|
|
Average
|
|
|
Total # of
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Stock Units
|
|
|
Fair Value
|
|
|
Stock Units
|
|
|
Fair Value
|
|
RSUs and PSUs outstanding, beginning of period
|
|
|
1,428,848
|
|
|
$
|
18.46
|
|
|
|
1,215,753
|
|
|
$
|
15.38
|
|
Awarded
|
|
|
236,876
|
|
|
|
20.84
|
|
|
|
344,134
|
|
|
|
16.94
|
|
Vested
|
|
|
(281,263
|
)
|
|
|
16.91
|
|
|
|
(363,702
|
)
|
|
|
11.53
|
|
Forfeited
|
|
|
(122,473
|
)
|
|
|
14.53
|
|
|
|
(15,006
|
)
|
|
|
15.99
|
|
RSUs and PSUs outstanding, end of period
|
|
|
1,261,988
|
|
|
$
|
19.33
|
|
|
|
1,181,179
|
|
|
$
|
17.02
|
|
As of October 31, 2017, there was $11.4 million of unrecognized compensation cost related to unvested RSUs and PSUs. This cost is expected to be recognized over a weighted average remaining contractual term of 1.6 years.
(10) Commitments and Contingencies:
Litigation
We are a defendant in five product liability cases and are aware of seven other product liability claims, which primarily allege defective product design, defective manufacturing, or failure to provide adequate warnings. In addition, we are a co-defendant in a case filed on August 27, 1999 by the city of Gary, Indiana against numerous firearm manufacturers, distributors, and dealers seeking to recover monetary damages, as well as injunctive relief, allegedly arising out of the misuse of firearms by third parties. We believe that the various allegations as described above are unfounded, and, in addition, that any accident and any results from them were due to negligence or misuse of the firearm by the claimant or a third party.
In addition, from time to time, we are involved in lawsuits, claims, investigations, and proceedings, including commercial, environmental, and employment matters, which arise in the ordinary course of business.
19
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
The relief sought in individual cases primarily includes compensatory and, sometimes, punitive da
mages. Certain of the cases and claims seek unspecified compensatory or punitive damages. In others, compensatory damages sought may range from less than $75,000 to approximately $900,000. In our experience, initial demands do not generally bear a reasonab
le relationship to the facts and circumstances of a particular matter. We believe that our accruals for product liability cases and claims, as described below, are a reasonable quantitative measure of the cost to us of product liability cases and claims.
We are vigorously defending ourselves in the lawsuits to which we are subject. An unfavorable outcome or prolonged litigation could harm our business. Litigation of this nature also is expensive and time consuming and diverts the time and attention of our management.
We monitor the status of known claims and the related product liability accrual, which includes amounts for defense costs for asserted and unasserted claims. After consultation with litigation counsel and a review of the merit of each claim, we have concluded that we are unable to reasonably estimate the probability or the estimated range of reasonably possible losses related to material adverse judgments related to such claims and, therefore, we have not accrued for any such judgments. To the extent that circumstances change and we determine that a loss (or an additional loss in excess of our accrual) is at least reasonably possible and material, we would then disclose an estimate of the possible loss or range of loss, if such estimate could be made, or disclose that an estimate could not be made. We believe that we have provided for adequate reserves for defense costs.
We have recorded our liability for defense costs before consideration for reimbursement from insurance carriers. We have also recorded the amounts due as reimbursement under existing policies from the insurance carriers as a receivable shown in other current assets and other assets.
At this time, an estimated range of reasonably possible additional losses relating to unfavorable outcomes cannot be made.
Rental Leases
On October 26, 2017, our wholly owned subsidiary, Smith & Wesson Corp., or Smith & Wesson, entered into a lease agreement, or the Lease, with Ryan Boone County, LLC, an affiliate of Ryan Companies US, Inc., for the design, construction, and lease of an approximately 632,000 square foot national distribution center in the Columbia area of Boone County, Missouri. The initial term of the lease is 20 years commencing on the rent commencement date, which is expected to begin in the second half of fiscal 2019. The Lease contains six, five-year options to extend the lease term. The base rent is calculated as a percentage multiplied by the project costs. The annual lease expense, including base rent, is estimated to be between $3.3 million and $3.5 million. We expect to receive various tax and other incentives from federal, state, and local governmental authorities. Under the Lease, we have a one-time right to purchase the distribution center and, under certain circumstances, may share with the landlord any gain on the sale of the property to a third party. We have guaranteed the Lease and expect it will be classified as a capital lease.
Costs incurred by Ryan Boone County, LLC throughout building construction will be recorded in construction in progress, offset by a capital lease payable, and will have no impact on cash flow during fiscal 2018. The total cost of the building is estimated to be between $45.0 million and $50.0 million, of which we expect approximately $30.0 million to $35.0 million will be recorded as a right of use asset on our condensed consolidated balance sheet when construction is complete. In addition, over the next two fiscal years, we expect to spend between $25.0 million and $30.0 million related to material handling equipment, information technology systems, and other capital projects in support of our national distribution center.
(11) Segment Information:
We report our results of operations in two segments: (1) Firearms and (2) Outdoor Products
& Accessories
. Our two segments are defined based on the reporting and review process used by the chief operating decision maker, our Chief Executive Officer. The Firearms segment has been determined to be a single operating segment and reporting segment based on our reliance on production metrics, such as gross margin per unit produced, units produced per day, incoming orders per day, and revenue produced by trade channel, all of which are particular to the Firearms segment. The Outdoor Products
& Accessories segment represents two operating segments that have been aggregated into a single reportable segment, which are evaluated b
y a measurement of incoming orders per day and sales and gross margin by customer and brand.
The Firearms segment includes our firearms and other components, which we manufacture at our facilities in Springfield, Massachusetts; Houlton, Maine; Eagle, Idaho; and Deep River, Connecticut and our firearm products, which we develop, assemble, and market in our Springfield, Massachusetts facility. The Outdoor Products
& Accessories
segment includes our accessories,
20
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
camping, and survival products, which we develop, source, market, and distribute at our facilities in Columbia, Missouri and Jacksonville, Fl
orida and our electro-optics products, which we develop, market, and assemble in our Wilsonville, Oregon facility. We report operating costs based on the activities performed within each segment.
Segment assets are those directly used in or clearly allocable to a reportable segment’s operations. Assets by business segment are presented in the following table as of October 31, 2017 and April 30, 2017 (in
thousands
):
|
|
As of October 31, 2017
|
|
|
As of April 30, 2017
|
|
|
|
Firearms
|
|
|
Outdoor Products & Accessories
|
|
|
Total
|
|
|
Firearms
|
|
|
Outdoor Products & Accessories
|
|
|
Total
|
|
Total assets
|
|
$
|
411,922
|
|
|
$
|
404,341
|
|
|
$
|
816,263
|
|
|
$
|
393,341
|
|
|
$
|
394,695
|
|
|
$
|
788,036
|
|
Property, plant, and equipment, net
|
|
|
130,074
|
|
|
|
13,700
|
|
|
|
143,774
|
|
|
|
135,985
|
|
|
|
13,700
|
|
|
|
149,685
|
|
Intangibles, net
|
|
|
5,020
|
|
|
|
118,399
|
|
|
|
123,419
|
|
|
|
2,792
|
|
|
|
138,525
|
|
|
|
141,317
|
|
Goodwill
|
|
|
18,389
|
|
|
|
172,709
|
|
|
|
191,098
|
|
|
|
13,770
|
|
|
|
155,247
|
|
|
|
169,017
|
|
21
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
Results by business segment are presented in the following tables for the three months ended October 31, 2017 and 2016 (in thousands):
|
|
For the Three Months Ended October 31, 2017 (a)
|
|
|
|
Firearms
|
|
|
Outdoor Products & Accessories
|
|
|
Corporate
|
|
|
Intersegment Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
100,305
|
|
|
$
|
48,122
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
148,427
|
|
Intersegment revenue
|
|
|
1,112
|
|
|
|
2,670
|
|
|
|
—
|
|
|
|
(3,782
|
)
|
|
|
—
|
|
Total net sales
|
|
|
101,417
|
|
|
|
50,792
|
|
|
|
—
|
|
|
|
(3,782
|
)
|
|
|
148,427
|
|
Cost of sales
|
|
|
72,164
|
|
|
|
28,383
|
|
|
|
—
|
|
|
|
(2,919
|
)
|
|
|
97,628
|
|
Gross margin
|
|
|
29,253
|
|
|
|
22,409
|
|
|
|
—
|
|
|
|
(863
|
)
|
|
|
50,799
|
|
Operating income/(loss)
|
|
|
2,264
|
|
|
|
2,584
|
|
|
|
(10,744
|
)
|
|
|
13,885
|
|
|
|
7,989
|
|
Income tax expense/(benefit)
|
|
|
3,666
|
|
|
|
1,069
|
|
|
|
(2,946
|
)
|
|
|
—
|
|
|
|
1,789
|
|
|
|
For the Three Months Ended October 31, 2016 (a)
|
|
|
|
Firearms
|
|
|
Outdoor Products & Accessories
|
|
|
Corporate
|
|
|
Intersegment Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
194,475
|
|
|
$
|
39,053
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
233,528
|
|
Intersegment revenue
|
|
|
932
|
|
|
|
3,301
|
|
|
|
—
|
|
|
|
(4,233
|
)
|
|
|
—
|
|
Total net sales
|
|
|
195,407
|
|
|
|
42,354
|
|
|
|
—
|
|
|
|
(4,233
|
)
|
|
|
233,528
|
|
Cost of sales
|
|
|
113,981
|
|
|
|
25,163
|
|
(b)
|
|
—
|
|
|
|
(3,221
|
)
|
|
|
135,923
|
|
Gross margin
|
|
|
81,426
|
|
|
|
17,191
|
|
|
|
—
|
|
|
|
(1,012
|
)
|
|
|
97,605
|
|
Operating income/(loss)
|
|
|
52,255
|
|
|
|
(391
|
)
|
|
|
(11,858
|
)
|
|
|
12,145
|
|
|
|
52,151
|
|
Income tax expense/(benefit)
|
|
|
20,797
|
|
|
|
673
|
|
|
|
(4,007
|
)
|
|
|
—
|
|
|
|
17,463
|
|
Results by business segment are presented in the following tables for the six months ended October 31, 2017 and 2016 (in thousands):
|
|
For the Six Months Ended October 31, 2017 (a)
|
|
|
|
Firearms
|
|
|
Outdoor Products & Accessories
|
|
|
Corporate
|
|
|
Intersegment Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
198,662
|
|
|
$
|
78,786
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
277,448
|
|
Intersegment revenue
|
|
|
2,193
|
|
|
|
4,541
|
|
|
|
—
|
|
|
|
(6,734
|
)
|
|
|
—
|
|
Total net sales
|
|
|
200,855
|
|
|
|
83,327
|
|
|
|
—
|
|
|
|
(6,734
|
)
|
|
|
277,448
|
|
Cost of sales
|
|
|
144,922
|
|
|
|
46,815
|
|
|
|
—
|
|
|
|
(5,720
|
)
|
|
|
186,017
|
|
Gross margin
|
|
|
55,933
|
|
|
|
36,512
|
|
|
|
—
|
|
|
|
(1,014
|
)
|
|
|
91,431
|
|
Operating income/(loss)
|
|
|
2,932
|
|
|
|
(2,309
|
)
|
|
|
(22,513
|
)
|
|
|
26,679
|
|
|
|
4,789
|
|
Income tax expense/(benefit)
|
|
|
6,063
|
|
|
|
(567
|
)
|
|
|
(5,833
|
)
|
|
|
—
|
|
|
|
(337
|
)
|
22
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2017 and 2016
|
|
For the Six Months Ended October 31, 2016 (a)
|
|
|
|
Firearms
|
|
|
Outdoor Products & Accessories
|
|
|
Corporate
|
|
|
Intersegment Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
386,875
|
|
|
$
|
53,604
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
440,479
|
|
Intersegment revenue
|
|
|
1,726
|
|
|
|
3,363
|
|
|
|
—
|
|
|
|
(5,089
|
)
|
|
|
—
|
|
Total net sales
|
|
|
388,601
|
|
|
|
56,967
|
|
|
|
—
|
|
|
|
(5,089
|
)
|
|
|
440,479
|
|
Cost of sales
|
|
|
226,351
|
|
|
|
33,037
|
|
(b)
|
|
—
|
|
|
|
(4,083
|
)
|
|
|
255,305
|
|
Gross margin
|
|
|
162,250
|
|
|
|
23,930
|
|
|
|
—
|
|
|
|
(1,006
|
)
|
|
|
185,174
|
|
Operating income/(loss)
|
|
|
106,672
|
|
|
|
(3,275
|
)
|
|
|
(22,781
|
)
|
|
|
24,060
|
|
|
|
104,676
|
|
Income tax expense/(benefit)
|
|
|
40,763
|
|
|
|
(384
|
)
|
|
|
(7,627
|
)
|
|
|
—
|
|
|
|
32,752
|
|
|
(a)
|
We allocate all of corporate overhead expenses except for interest and income taxes, such as general and administrative expenses and other corporate-level expenses, to both our Firearms and Outdoor Products & Accessories segments.
|
|
(b)
|
Amount includes $3.8 million of additional cost of goods sold from the fair value step-up in inventory and backlog expense related to the acquisition of Crimson Trace Corporation.
|
23