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, 2018 and 2017
(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, 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.
(2) Basis of Presentation:
Interim Financial Information –
The condensed consolidated balance sheet as of October 31, 2018, the condensed consolidated statements of income and comprehensive income for the three and six months ended October 31, 2018 and 2017, the condensed consolidated statement of changes in stockholders’ equity for the six months ended October 31, 2018, and the condensed consolidated statements of cash flows for the three and six months ended October 31, 2018 and 2017 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, 2018 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 six months ended
October 31, 2018
may
not be indicative of the results that may be expected for the year ending April 30, 2019, or any other period.
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.
9
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs under which customers are e
ntitled 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 sa
les 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.
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 that 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 13 —
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.
10
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
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 six month period ended October 31, 2018 (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
|
|
For the six months ended October 31, 2018, we recognized $26.3 million of revenue previously deferred as the performance obligation relating to sales promotions was satisfied. This recognition of revenue was partially offset by $12.0 million of additional deferred revenue for outstanding performance obligations relating to sales promotions that have not been satisfied, which was recorded to accrued expenses in the condensed consolidated balance sheet. This resulted in a $14.3 million net increase of revenue for the six months ended October 31, 2018. We estimate that revenue from the outstanding performance obligations as of October 31, 2018 will be recognized during fiscal 2019. As a result of the adoption of ASU 2014-09, for the three months ended October 31, 2018, gross margin was decreased by 1.0% and there was no impact to earnings per share and for the six months ended October 31, 2018, gross margin was decreased by 0.9% 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 October 31, 2018, 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, 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.
11
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
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:
The changes in the carrying amount of goodwill for the three and six months ended October 31, 2018 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
|
|
Refer to Note 13 —
Segment Reporting
below for more detail.
12
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
(6) Notes, Loans Payable, and Financing Arrangements:
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 $84.5 million remained outstanding as of October 31, 2018. The Revolving Line provides for availability 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. On October 27, 2016, we entered into a second amendment to our Credit Agreement, or the Second Amendment, which, among other things, 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, 2018, we had $25.0 million of borrowings outstanding on the Revolving Line, which bore interest at 4.29%, 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 under the Term Loan on the maturity date of June 15, 2020 will be due in full.
We were required to obtain 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 equal to the one-month LIBOR rate. 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, 2018, our interest rate on the Term Loan was 4.16%.
As of October 31, 2018, the interest rate swap was considered effective and had no effect on earnings. The fair value of the interest rate swap on October 31, 2018 was an asset of $1.9 million, which was recorded in other assets on our condensed consolidated balance sheet. We do not expect the interest rate swap to have any material impact on earnings within the next 12 months.
2018 Senior Notes
– During fiscal 2015, we issued an aggregate of $75.0 million of 5.000% Senior Notes due 2018, or the 2018 Senior Notes, to various institutional investors pursuant to the terms and conditions of an indenture and purchase agreements. The 2018 Senior Notes bore interest at a rate of 5.000% per annum payable on 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 2018 Senior Notes. As discussed below, the 2018 Senior Notes were redeemed on March 8, 2018 with proceeds from the issuance of 5.000% Senior Notes due 2020, or the 2020 Senior Notes. As part of the redemption, in fiscal 2018, we wrote off $226,000 of debt issuance costs related to the 2018 Senior Notes.
2020 Senior Notes
– On February 28, 2018, we issued an aggregate of $75.0 million of
the 2020 Senior Notes to various institutional investors pursuant to the terms and conditions of an indenture, or the 2020 Senior Notes Indenture, and purchase agreements. The 2020 Senior Notes bear interest at a rate of 5.000% per annum payable on February 28 and August 28 of each year, beginning on August 28, 2018. We incurred $158,000 of debt issuance costs related to the issuance of the 2020 Senior Notes.
At any time prior to February 28, 2019, we may, at our option, upon not less than 30 nor more than 60 days’ prior notice, redeem all or a portion of the 2020 Senior Notes at a redemption price of 102.500% of the principal amount of the 2020 Senior Notes to be redeemed plus accrued and unpaid interest as of the applicable redemption date. On or after February 28, 2019, we may, at our option, upon not less than 30 nor more than 60 days’ prior notice, redeem all or a portion of the 2020 Senior Notes at a redemption price of 100.000% of the principal amount of the 2020 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 2020 Senior Notes from the holders of the 2020 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 2020 Senior Notes mature on August 28, 2020.
13
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
The 2020 Senior Notes are general, unsecured obligations of our company. The 2020 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 t
hat would otherwise be characterized as restricted payments are permitted under the 2020 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 2020 Senior Notes Indenture, or the 2020 Senior Notes Lifetime Aggreg
ate Limit. In addition, the 2020 Senior Notes Indenture provides for other exceptions to the restricted payments covenant, each of which are independent of the 2020 Senior Notes Lifetime Aggregate Limit. Among such exceptions are (i) the ability to make sh
are 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 2020 Senior Notes in an aggregate amount not to exceed $75.0 million.
The limitation on indebtedness in the 2020 Senior Notes Indenture is only applicable at such time that the consolidated coverage ratio (as set forth in the 2020 Senior Notes Indenture) for us and our restricted subsidiaries is less than 3.00 to 1.00. In general, as set forth in the 2020 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 2020 Senior Notes as of October 31, 2018 approximated the 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 2020 Senior Notes Indenture contains a financial covenant relating to times interest earned.
Letters of Credit
– At October 31, 2018, we had outstanding letters of credit aggregating $1.0 million.
(7) 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 $36.4 million and $48.9 million as of October 31, 2018 and April 30, 2018, respectively. We utilized Level 1 of the value hierarchy to determine the fair values of these assets.
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 prices 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 which 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).
|
14
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
The carrying value of our Term Loan approximated the fair value as of
October
31, 2
018
in considering Level 2 inputs within the hierarchy. The carrying value of our 2020 Senior Notes as of
October
31, 2018 approximated the fair value in considering Level 2
inputs within the hierarchy as our 2020 Senior Notes are not frequently traded. The fair value of our 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 interes
t rate yield curves, and, therefore, is classified within Level 2 of the valuation hierarchy. For more information regarding the int
erest rate swap, refer to Note 6
—
Notes, Loans Payable, and Financing Arrangements
.
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 our acquisition of substantially all the net assets of Ultimate Survival Technologies, Inc. in fiscal 2017, up to an additional $2.0 million may be paid by us 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, during fiscal 2018, we recorded a $1.6 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, 2018, the fair value of this contingent liability was $60,000, 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 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 October 31, 2018, the contingent liability was recorded at a fair value of $100,000 in non-current liabilities.
(8) 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, 2018 and April 30, 2018 (in thousands):
|
|
October 31, 2018
|
|
|
April 30, 2018
|
|
Finished goods
|
|
$
|
115,015
|
|
|
$
|
91,480
|
|
Finished parts
|
|
|
38,452
|
|
|
|
42,075
|
|
Work in process
|
|
|
7,511
|
|
|
|
7,657
|
|
Raw material
|
|
|
14,239
|
|
|
|
12,141
|
|
Total inventories
|
|
$
|
175,217
|
|
|
$
|
153,353
|
|
15
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
(9) Intangible Assets:
The following table presents a summary of intangible assets as of October 31, 2018 and April 30, 2018 (in thousands):
|
|
October 31, 2018
|
|
|
April 30, 2018
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Customer relationships
|
|
$
|
92,360
|
|
|
$
|
(33,311
|
)
|
|
$
|
59,049
|
|
|
$
|
92,360
|
|
|
$
|
(28,252
|
)
|
|
$
|
64,108
|
|
Developed technology
|
|
|
21,130
|
|
|
|
(10,827
|
)
|
|
|
10,303
|
|
|
|
21,130
|
|
|
|
(8,178
|
)
|
|
|
12,952
|
|
Patents, trademarks, and trade names
|
|
|
57,125
|
|
|
|
(25,379
|
)
|
|
|
31,746
|
|
|
|
56,718
|
|
|
|
(22,099
|
)
|
|
|
34,619
|
|
Backlog
|
|
|
1,150
|
|
|
|
(1,150
|
)
|
|
|
—
|
|
|
|
1,150
|
|
|
|
(1,150
|
)
|
|
|
—
|
|
|
|
|
171,765
|
|
|
|
(70,667
|
)
|
|
|
101,098
|
|
|
|
171,358
|
|
|
|
(59,679
|
)
|
|
|
111,679
|
|
Patents in progress
|
|
|
640
|
|
|
|
—
|
|
|
|
640
|
|
|
|
855
|
|
|
|
—
|
|
|
|
855
|
|
Total definite-lived intangible assets
|
|
|
172,405
|
|
|
|
(70,667
|
)
|
|
|
101,738
|
|
|
|
172,213
|
|
|
|
(59,679
|
)
|
|
|
112,534
|
|
Indefinite-lived intangible assets
|
|
|
226
|
|
|
|
—
|
|
|
|
226
|
|
|
|
226
|
|
|
|
—
|
|
|
|
226
|
|
Total intangible assets
|
|
$
|
172,631
|
|
|
$
|
(70,667
|
)
|
|
$
|
101,964
|
|
|
$
|
172,439
|
|
|
$
|
(59,679
|
)
|
|
$
|
112,760
|
|
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 $5.5 million and $4.3 million for the three months ended October 31, 2018 and 2017, respectively. Amortization expense, excluding amortization of deferred financing costs, amounted to $11.0 million and $10.1 for the six months ended October 31, 2018 and 2017, respectively.
Estimated amortization expense of intangible assets for the remainder of fiscal 2019 and succeeding fiscal years is as follows:
Fiscal
|
|
Amount
|
|
2019
|
|
$
|
11,003
|
|
2020
|
|
|
19,124
|
|
2021
|
|
|
16,516
|
|
2022
|
|
|
14,136
|
|
2023
|
|
|
11,773
|
|
Thereafter
|
|
|
28,546
|
|
Total
|
|
$
|
101,098
|
|
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, 2018. There were no events or changes in circumstances that would indicate the fair value of intangible assets was reduced below its carrying value during the six months ended October 31, 2018, and, therefore, intangible assets were not tested for impairment.
(10) 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. As of October 31, 2018, 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, 2018 and 2017
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, 2018 and 2017 (in thousands, except per share data):
|
For the Three Months Ended October 31,
|
|
|
2018
|
|
|
2017
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
Basic earnings
|
$
|
|
6,665
|
|
|
|
54,444
|
|
|
$
|
|
0.12
|
|
|
$
|
|
3,234
|
|
|
|
54,044
|
|
|
$
|
|
0.06
|
|
Effect of dilutive stock awards
|
|
—
|
|
|
|
663
|
|
|
|
—
|
|
|
|
—
|
|
|
612
|
|
|
|
—
|
|
Diluted earnings
|
$
|
|
6,665
|
|
|
|
55,107
|
|
|
$
|
|
0.12
|
|
|
$
|
|
3,234
|
|
|
|
54,656
|
|
|
$
|
|
0.06
|
|
|
For the Six Months Ended October 31,
|
|
|
2018
|
|
|
2017
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
Basic earnings
|
$
|
|
14,310
|
|
|
|
54,395
|
|
|
$
|
|
0.26
|
|
|
$
|
|
1,067
|
|
|
|
53,975
|
|
|
$
|
|
0.02
|
|
Effect of dilutive stock awards
|
|
—
|
|
|
|
652
|
|
|
|
—
|
|
|
|
—
|
|
|
|
825
|
|
|
|
—
|
|
Diluted earnings
|
$
|
|
14,310
|
|
|
|
55,047
|
|
|
$
|
|
0.26
|
|
|
$
|
|
1,067
|
|
|
|
54,800
|
|
|
$
|
|
0.02
|
|
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, 2018 and 2017.
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.
The number of shares and weighted average exercise prices of stock options for the six months ended October 31, 2018 and 2017 were as follows:
|
For the Six Months Ended October 31,
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
Options outstanding, beginning of year
|
|
316,160
|
|
|
$
|
6.69
|
|
|
|
335,160
|
|
|
$
|
6.58
|
|
Exercised during the period
|
|
(32,899
|
)
|
|
|
6.52
|
|
|
—
|
|
|
—
|
|
Options outstanding, end of period
|
|
283,261
|
|
|
$
|
6.71
|
|
|
|
335,160
|
|
|
$
|
6.58
|
|
Weighted average remaining contractual life
|
2.74 years
|
|
|
|
|
|
|
3.51 years
|
|
|
|
|
|
Options exercisable, end of period
|
|
283,261
|
|
|
$
|
6.71
|
|
|
|
335,160
|
|
|
$
|
6.58
|
|
Weighted average remaining contractual life
|
2.74 years
|
|
|
|
|
|
|
3.51 years
|
|
|
|
|
|
The aggregate intrinsic value of outstanding and exercisable stock options as of October 31, 2018 and 2017 was $2.0 million and $2.6 million, respectively. The aggregate intrinsic value of the stock options exercised in the three and six months ended October 31, 2018 was $154,000 and $230,000, respectively. There were no stock options exercised in the three and six months ended October 31, 2017. At October 31, 2018, there were no unrecognized compensation expense of outstanding stock options.
17
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
We have an Employee Stock Purchase Plan, or ESPP, in which 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.
During the six months ended October 31, 2018 and 2017, 107,525
and
81,643
shares were purchase
d
under our ESPP, respectively.
The total stock-based compensation expense, including stock options, purchases under our ESPP, RSUs, and performance-based RSUs, or PSUs, was $4.0 million and $4.2 million for the six months ended October 31, 2018 and 2017, 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 and directors. The awards are made at no cost to the recipient. An RSU represents the right to receive one share of our common stock and does not carry voting or dividend rights. Except in specific circumstances, RSU grants to employees vest over a period of four years with one-fourth of the units vesting on each anniversary of the grant date. The aggregate fair value of our RSU grants is amortized to compensation expense over the vesting period.
We grant PSUs to our executive officers and certain management employees who are not executive officers. The PSUs vest, and the fair value of such PSUs will be recognized, over the corresponding three-year performance period.
During the six months ended October 31, 2018, we granted an aggregate of 191,085 service-based RSUs, including 141,576 to non-executive officer employees and 49,509 RSUs to our directors. Compensation expense recognized related to grants of RSUs and PSUs was $3.6 million for the six months ended October 31, 2018. During the six months ended October 31, 2018, we cancelled 112,000 PSUs as a result of the performance metric not being met and 16,363 service-based RSUs as a result of the service condition not being met. In connection with the vesting of RSUs, during the six months ended October 31, 2018, we delivered common stock to our employees and directors, including our executive officers, with a total market value of $2.2 million.
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, or the maximum award possible, 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.
A summary of activity for unvested RSUs and PSUs for the six months ended October 31, 2018 and 2017 is as follows:
|
|
For the Six Months Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
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
|
|
|
1,442,316
|
|
|
$
|
17.80
|
|
|
|
1,428,848
|
|
|
$
|
18.46
|
|
Awarded
|
|
|
191,085
|
|
|
|
12.61
|
|
|
|
236,876
|
|
|
|
20.84
|
|
Vested
|
|
|
(182,536
|
)
|
|
|
19.83
|
|
|
|
(281,263
|
)
|
|
|
16.91
|
|
Forfeited
|
|
|
(128,363
|
)
|
|
|
15.91
|
|
|
|
(122,473
|
)
|
|
|
14.53
|
|
RSUs and PSUs outstanding, end of period
|
|
|
1,322,502
|
|
|
$
|
16.99
|
|
|
|
1,261,988
|
|
|
$
|
19.33
|
|
As of October 31, 2018, there was $8.3 million of unrecognized compensation expense related to unvested RSUs and PSUs. This expense is expected to be recognized over a weighted average remaining contractual term of 1.5 years.
18
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
(11
)
Income Taxes:
Income tax provisions for interim periods are based on estimated effective annual income tax rates and include federal and state income taxes.
On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation with the Tax Cuts and Jobs Act, or Tax Reform, which makes broad and complex changes to the U.S. tax code. Tax Reform significantly revised the corporate federal income tax by, among other things, lowering the corporate federal income tax rate, limiting various deductions, and repealing the domestic manufacturing deduction. We expect to see net benefits from the lower federal tax rate, although there are offsetting effects from other components of Tax Reform.
Tax Reform reduced the U.S. federal statutory income tax rate from 35% to 21% generally effective for tax years beginning on or after January 1, 2018. Our U.S. federal statutory tax rate will be 21.0% in fiscal 2019.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118, or SAB118, that provides additional guidance allowing companies to use a measurement period, similar to that used in business combinations, to account for the impacts of Tax Reform in their financial statements. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the Tax Reform is incomplete, but the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. We have accounted for the impacts of Tax Reform to the extent a reasonable estimate could be made during the fiscal year ending April 30, 2019. We will continue to refine our estimates throughout the measurement period or until the accounting is complete.
We estimated the impact of Tax Reform, based on currently available information and interpretations of the law, to be a benefit to us of $8.7 million, which was included in our fiscal 2018 tax benefit. The majority of the tax benefit is due to remeasurement of deferred tax assets and liabilities at lower enacted corporate federal tax rates, which did not have a cash impact on fiscal 2018. The actual impact of Tax Reform may differ from this estimate, possibly materially, because of, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and actions we may take as a result of Tax Reform.
The income tax provisions represented effective tax rates of 26.4% and 35.6% for the three months ended October 31, 2018 and 2017, respectively. The income tax provisions represented effective tax rates of 30.3% and -46.2% for the six months ended October 31, 2018 and 2017, respectively.
(12) Commitments and Contingencies:
Litigation
In January 2018, Gemini Technologies, Incorporated, or Gemini, commenced an action against us and Smith & Wesson Corp. in the United States District Court for the District of Idaho, or District Court. The complaint alleges, among other things, that the defendants breached the earn-out and other provisions of the Asset Purchase Agreement and ancillary agreements between the parties in connection with Smith & Wesson Corp.’s acquisition of the Gemtech business from Gemini. The complaint seeks a declaratory judgment interpreting various terms of the Asset Purchase Agreement and damages in the sum of $18.6 million. In May 2018, the District Court dismissed the complaint on the grounds of
forum non conveniens.
In June 2018, Gemini appealed the decision dismissing its complaint to the U.S. Court of Appeals for the Ninth Circuit. We believe the claims asserted in the complaint have no merit, and we intend to aggressively defend this action.
We are a defendant in seven product liability cases and are aware of seven other product liability claims, primarily alleging 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. In January 2018, the trial court granted defendants’ Motion for Judgement on the Pleadings, dismissing the case in its entirety. In February 2018, plaintiffs appealed the dismissal to the Indiana Court of Appeals. In May 2018, we were named in an action related to the Parkland, Florida shooting, filed in the Circuit Court, Broward County, Florida, seeking a declaratory judgement that a Florida statute that provides firearm manufacturers and dealers immunity from liability when their legally manufactured and lawfully sold firearms are later used in criminal acts only applies to civil actions commenced by governmental agencies not private litigants. In August 2018, we moved to dismiss the complaint on the grounds that it seeks an impermissible advisory opinion.
19
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
We believe that the various allegations as described above are unfounded, and, in addition, that any
incident
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.
The relief sought in individual cases primarily includes compensatory and, sometimes, punitive damages. 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 $350,000. In our experience, initial demands do not generally bear a reasonable 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, 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. In the future, should 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 adequate accruals for defense costs.
We have recorded our liability for defense costs before consideration for reimbursement from insurance carriers. We have also recorded the amount 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.
Leases
In fiscal 2017, we announced a plan to establish a national logistics facility in Boone County, Missouri. We ultimately plan to rely on this logistics facility for substantially all of our product distribution. In fiscal 2018, we broke ground on our new 633,000 square foot facility, which was completed in November 2018 and will become operational over the course of the remainder of the fiscal year. The building for our national logistics facility will be treated as a capital lease and will be recorded in construction in progress, offset by a capital lease payable throughout building construction and will have no impact on cash flow. The total cost of the building is approximately $46.0 million, of which we expect approximately $44.0 million will be recorded as a right of use asset on our condensed consolidated balance sheet when construction is complete. In addition, 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 logistics facility. As of October 31, 2018, we have recorded $38.5 million in construction in progress, which is included in property, plant, and equipment in our condensed consolidated balance sheet, for costs incurred by the builder relating to the purchase of land and costs related to the design and construction of the building, offset by a $38.5 million capital lease payable, which is included in capital lease payable, net of current portion, in our condensed consolidated balance sheet.
UST Transition
In August 2018, we announced a plan to transition our Ultimate Survival Technologies, LLC, or UST, business and operations into our Columbia, Missouri facility. That plan includes (i) closing our Jacksonville, Florida facility as part of our previously announced strategy to consolidate warehousing and logistics operations into the national logistics facility that we are constructing in Missouri and (ii) relocating our Jacksonville-based UST sales, marketing, and research and development activities to Columbia, Missouri. In connection with the integration, we expect to incur restructuring charges of approximately $1.5 million to $2.5 million relating to tangible asset impairment, severance, retention, and relocation beginning in our second quarter of fiscal 2019 and concluding in our first quarter of fiscal 2020, with cash outlays primarily being incurred in our first quarter of fiscal 2020. As of October 31, 2018, there have not any material costs associated with this transition.
20
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
(13
) Segment Reporting:
We report our results of operations in two segments: (1) Firearms (which includes Firearms and Manufacturing Services divisions) and (2) Outdoor Products
& Accessories (which includes the Outdoor Products & Accessories and Electro-Optics divisions)
. 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 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, services, and other components, which we manufacture or provide at our facilities in Springfield, Massachusetts; Houlton, Maine; Meridian, 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 products, which we develop, source, market, and distribute at our facilities in Columbia, Missouri and Jacksonville, Florida, 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, 2018 and April 30, 2018 (in
thousands
):
|
|
As of October 31, 2018
|
|
|
As of April 30, 2018
|
|
|
|
Firearms
|
|
|
Outdoor
Products
&
Accessories
|
|
|
Total
|
|
|
Firearms
|
|
|
Outdoor
Products &
Accessories
|
|
|
Total
|
|
Total assets
|
|
$
|
372,193
|
|
|
$
|
397,437
|
|
|
$
|
769,630
|
|
|
$
|
346,517
|
|
|
$
|
398,543
|
|
|
$
|
745,060
|
|
Property, plant, and equipment, net
|
|
|
166,916
|
|
|
|
12,720
|
|
|
|
179,636
|
|
|
|
146,154
|
|
|
|
12,971
|
|
|
|
159,125
|
|
Intangibles, net
|
|
|
4,746
|
|
|
|
97,218
|
|
|
|
101,964
|
|
|
|
4,944
|
|
|
|
107,816
|
|
|
|
112,760
|
|
Goodwill
|
|
|
19,024
|
|
|
|
172,797
|
|
|
|
191,821
|
|
|
|
18,490
|
|
|
|
172,797
|
|
|
|
191,287
|
|
Results by business segment are presented in the following tables for the three months ended October 31, 2018 and 2017 (in thousands):
|
|
For the Three Months Ended October 31, 2018 (a)
|
|
|
|
Firearms
|
|
|
Outdoor
Products &
Accessories
|
|
|
Corporate
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
110,994
|
|
|
$
|
50,709
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
161,703
|
|
Intersegment revenue
|
|
|
762
|
|
|
|
5,242
|
|
|
|
—
|
|
|
|
(6,004
|
)
|
|
|
—
|
|
Total net sales
|
|
|
111,756
|
|
|
|
55,951
|
|
|
|
—
|
|
|
|
(6,004
|
)
|
|
|
161,703
|
|
Cost of sales
|
|
|
79,912
|
|
|
|
30,536
|
|
|
|
—
|
|
|
|
(5,131
|
)
|
|
|
105,317
|
|
Gross margin
|
|
|
31,844
|
|
|
|
25,415
|
|
|
|
—
|
|
|
|
(873
|
)
|
|
|
56,386
|
|
Operating income/(loss)
|
|
|
10,371
|
|
|
|
397
|
|
|
|
(11,189
|
)
|
|
|
11,747
|
|
|
|
11,326
|
|
Income tax expense/(benefit)
|
|
|
2,709
|
|
|
|
418
|
|
|
|
(732
|
)
|
|
|
—
|
|
|
|
2,395
|
|
|
|
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
|
|
21
AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended October 31, 2018 and 2017
Results by business segment are presented in th
e following tables for the six
months ended
October
31, 2018 and 2017 (in thousands):
|
|
For the Six Months Ended October 31, 2018 (a)
|
|
|
|
Firearms
|
|
|
Outdoor
Products &
Accessories
|
|
|
Corporate
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
215,468
|
|
|
$
|
85,068
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
300,536
|
|
Intersegment revenue
|
|
|
1,546
|
|
|
|
8,139
|
|
|
|
—
|
|
|
|
(9,685
|
)
|
|
|
—
|
|
Total net sales
|
|
|
217,014
|
|
|
|
93,207
|
|
|
|
—
|
|
|
|
(9,685
|
)
|
|
|
300,536
|
|
Cost of sales
|
|
|
150,377
|
|
|
|
50,910
|
|
|
|
—
|
|
|
|
(9,559
|
)
|
|
|
191,728
|
|
Gross margin
|
|
|
66,637
|
|
|
|
42,297
|
|
|
|
—
|
|
|
|
(126
|
)
|
|
|
108,808
|
|
Operating income/(loss)
|
|
|
24,461
|
|
|
|
(2,021
|
)
|
|
|
(21,740
|
)
|
|
|
24,101
|
|
|
|
24,801
|
|
Income tax expense/(benefit)
|
|
|
6,834
|
|
|
|
(7
|
)
|
|
|
(619
|
)
|
|
|
—
|
|
|
|
6,208
|
|
|
|
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
|
)
|
|
(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.
|
22