10-Q 1 aobc-10q_20170131.htm 10Q aobc-10q_20170131.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended January 31, 2017

Commission File No. 001-31552

 

American Outdoor Brands Corporation

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

 

87-0543688

(State or other jurisdiction of

incorporation or organization)

 

 

(I.R.S. Employer

Identification No.)

 

2100 Roosevelt Avenue

Springfield, Massachusetts

 

01104

(Address of principal executive offices)

 

(Zip Code)

(800) 331-0852

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

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

The registrant had 56,356,651 shares of common stock, par value $0.001, outstanding as of February 28, 2017.

 

 

 

 


AMERICAN OUTDOOR BRANDS CORPORATION

Quarterly Report on Form 10-Q

For the Three and Nine Months Ended January 31, 2017 and 2016

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

4

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

23

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

33

 

Item 4. Controls and Procedures

  

33

 

 

 

 

PART II - OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

34

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

Item 6. Exhibits

  

34

Signatures

  

35

EX-3.4

 

 

EX-31.1

  

 

EX-31.2

  

 

EX-32.1

  

 

EX-32.2

  

 

EX-101 INSTANCE DOCUMENT

 

 

EX-101 SCHEMA DOCUMENT

 

 

EX-101 CALCULATION LINKBASE DOCUMENT

 

 

EX-101 DEFINITION LINKBASE DOCUMENT

 

 

EX-101 LABEL LINKBASE DOCUMENT

 

 

EX-101 PRESENTATION LINKBASE DOCUMENT

 

 

 

 

 


Statement Regarding Forward-Looking Information

 

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding the impact, if any, of recently issued accounting standards on our consolidated financial statements; our assessment of factors relating to the valuation of assets acquired and liabilities assumed in Acquisitions, the timing for such evaluations, and the potential adjustment in such evaluations; assessments that we make about determining segments and reporting units; the features of our outstanding debt and our expectation that our interest rate swap will not have any material effect on our earnings within the next 12 months; estimated amortization expense of intangible assets for future periods; the potential for impairment charges; potential repurchases of our common stock; the outcome of the lawsuits to which we are subject and their effect on us; the amount of environmental and other reserves; our belief concerning the reasons for the reduction in adjusted NICS in December and January; our belief that a softer retail environment in firearms could continue for several months; our determination to take actions to match our firearms manufacturing output with the potentially soft demand environment, including reducing our reliance on outsourcing, as well as our assessment that such reductions may not occur rapidly enough to prevent a buildup in inventory; our belief that inventory levels could continue to rise in the next quarter because of the potential that the typical increase in orders during the trade show season may not occur; the effects of acquisitions on our overall financial performance; our assessment of our acquisitions, including the quality and strength of their products; our assessment of consumer demand and factors that stimulate demand for our products; the effect on our business of various factors, including terrorism and the level of political pressures on firearm laws and regulations; future investments for capital expenditures; future products and product developments; the features, quality, and performance of our products; the success of particular product or marketing programs; our market share and factors that affect our market share; and liquidity and anticipated cash needs and availability. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors could cause actual results to differ materially from those indicated by the forward-looking statements, including the demand for our products; the costs and ultimate conclusion of certain legal matters; the state of the U.S. economy in general and the firearm industry in particular; general economic conditions and consumer spending patterns; the potential for increased regulation of firearms and firearm-related products; speculation surrounding fears of terrorism and crime; our growth opportunities; our anticipated growth; our ability to increase demand for our products in various markets, including consumer, law enforcement, and military channels, domestically and internationally; the position of our hunting products in the consumer discretionary marketplace and distribution channel; our penetration rates in new and existing markets; our strategies; our ability to introduce new products; the success of new products; our ability to expand our markets; our ability to integrate acquired businesses in a successful manner; the general growth of our outdoor products and accessories business; the potential for cancellation of orders from our backlog;  and other factors detailed from time to time in our reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended April 30, 2016, filed with the SEC on June 16, 2016.

 

 

 


PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

As of:

 

 

January 31, 2017

 

 

April 30, 2016

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

54,253

 

 

$

191,279

 

Accounts receivable, net of allowance for doubtful accounts of $564 on

  January 31, 2017 and $680 on April 30, 2016

 

72,919

 

 

 

57,792

 

Inventories

 

128,096

 

 

 

77,789

 

Prepaid expenses and other current assets

 

6,735

 

 

 

4,307

 

Income tax receivable

 

575

 

 

 

2,064

 

Total current assets

 

262,578

 

 

 

333,231

 

Property, plant, and equipment, net

 

151,645

 

 

 

135,405

 

Intangibles, net

 

147,045

 

 

 

62,924

 

Goodwill

 

168,829

 

 

 

76,357

 

Other assets

 

9,623

 

 

 

11,586

 

 

$

739,720

 

 

$

619,503

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

55,578

 

 

$

45,513

 

Accrued expenses

 

35,412

 

 

 

28,447

 

Accrued payroll and incentives

 

19,066

 

 

 

18,784

 

Accrued income taxes

 

2,349

 

 

 

5,960

 

Accrued profit sharing

 

9,865

 

 

 

11,459

 

Accrued warranty

 

5,968

 

 

 

6,129

 

Current portion of notes payable

 

6,300

 

 

 

6,300

 

Total current liabilities

 

134,538

 

 

 

122,592

 

Deferred income taxes

 

21,212

 

 

 

12,161

 

Notes payable, net of current portion

 

161,990

 

 

 

166,564

 

Other non-current liabilities

 

9,685

 

 

 

10,370

 

Total liabilities

 

327,425

 

 

 

311,687

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

   or outstanding

 

 

 

 

 

Common stock, $.001 par value, 100,000,000 shares authorized, 71,918,857 shares

   issued and 56,356,235 shares outstanding on January 31, 2017 and

   71,558,633 shares issued and 55,996,011 shares outstanding on April 30, 2016

 

72

 

 

 

72

 

Additional paid-in capital

 

242,586

 

 

 

239,505

 

Retained earnings

 

341,471

 

 

 

241,310

 

Accumulated other comprehensive income/(loss)

 

489

 

 

 

(748

)

Treasury stock, at cost (15,562,622 shares on January 31, 2017 and

   April 30, 2016)

 

(172,323

)

 

 

(172,323

)

Total stockholders’ equity

 

412,295

 

 

 

307,816

 

 

$

739,720

 

 

$

619,503

 

 

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

4


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended January 31,

 

 

For the Nine Months Ended January 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In thousands, except per share data)

 

Net sales

 

$

233,523

 

 

$

210,786

 

 

$

674,002

 

 

$

501,791

 

Cost of sales

 

 

134,212

 

 

 

124,128

 

 

 

389,517

 

 

 

300,048

 

Gross profit

 

 

99,311

 

 

 

86,658

 

 

 

284,485

 

 

 

201,743

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,764

 

 

 

2,521

 

 

 

7,614

 

 

 

7,612

 

Selling and marketing

 

 

15,052

 

 

 

11,505

 

 

 

36,773

 

 

 

33,260

 

General and administrative

 

 

31,286

 

 

 

22,484

 

 

 

85,210

 

 

 

59,124

 

Total operating expenses

 

 

49,102

 

 

 

36,510

 

 

 

129,597

 

 

 

99,996

 

Operating income

 

 

50,209

 

 

 

50,148

 

 

 

154,888

 

 

 

101,747

 

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

 

(8

)

 

 

(5

)

 

 

(37

)

 

 

(17

)

Interest expense, net

 

 

(1,939

)

 

 

(2,079

)

 

 

(6,128

)

 

 

(11,575

)

Total other expense, net

 

 

(1,947

)

 

 

(2,084

)

 

 

(6,165

)

 

 

(11,592

)

Income from operations before income taxes

 

 

48,262

 

 

 

48,064

 

 

 

148,723

 

 

 

90,155

 

Income tax expense

 

 

15,809

 

 

 

16,630

 

 

 

48,562

 

 

 

31,844

 

Net income

 

 

32,453

 

 

 

31,434

 

 

 

100,161

 

 

 

58,311

 

Comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized income/(loss) on interest rate swap

 

 

1,524

 

 

 

(740

)

 

 

1,929

 

 

 

(1,224

)

Other comprehensive income/(loss), before income taxes

 

 

1,524

 

 

 

(740

)

 

 

1,929

 

 

 

(1,224

)

Income tax (expense)/benefit on other comprehensive income/(loss)

 

 

(558

)

 

 

274

 

 

 

(692

)

 

 

451

 

Other comprehensive income/(loss), net of tax

 

 

966

 

 

 

(466

)

 

 

1,237

 

 

 

(773

)

Comprehensive income

 

$

33,419

 

 

$

30,968

 

 

$

101,398

 

 

$

57,538

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.57

 

 

$

1.78

 

 

$

1.07

 

Diluted

 

$

0.57

 

 

$

0.56

 

 

$

1.75

 

 

$

1.05

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

56,342

 

 

 

54,857

 

 

 

56,208

 

 

 

54,508

 

Diluted

 

 

57,127

 

 

 

55,981

 

 

 

57,166

 

 

 

55,784

 

 

 

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

 

5


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Stockholders’

 

(In thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income/(Loss)

 

 

Shares

 

 

Amount

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2016

 

 

71,559

 

 

$

72

 

 

$

239,505

 

 

$

241,310

 

 

$

(748

)

 

 

15,563

 

 

$

(172,323

)

 

$

307,816

 

Proceeds from exercise of employee stock

   options

 

 

54

 

 

 

 

 

 

193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

193

 

Stock-based compensation

 

 

 

 

 

 

 

 

6,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,383

 

Shares issued under employee stock purchase     plan

 

 

67

 

 

 

 

 

 

948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

948

 

Change in unrealized income on interest rate

   swap, net of tax effect

 

 

 

 

 

 

 

 

 

 

1,237

 

 

 

 

 

 

 

1,237

 

Issuance of common stock under restricted

   stock unit awards, net of shares surrendered

 

 

239

 

 

 

 

 

 

(4,443

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,443

)

Net income

 

 

 

 

 

 

 

 

 

 

100,161

 

 

 

 

 

 

 

 

 

 

 

 

100,161

 

Balance at January 31, 2017

 

 

71,919

 

 

$

72

 

 

$

242,586

 

 

$

341,471

 

 

$

489

 

 

 

15,563

 

 

$

(172,323

)

 

$

412,295

 

 

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

 

 

 

6


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Nine Months Ended January 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

100,161

 

 

$

58,311

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

37,187

 

 

 

30,836

 

Loss on sale/disposition of assets

 

 

98

 

 

 

138

 

Provision for losses on notes and accounts receivable

 

 

179

 

 

 

2

 

Deferred income taxes

 

 

(12,300

)

 

 

244

 

Stock-based compensation expense

 

 

6,383

 

 

 

4,885

 

Changes in operating assets and liabilities (net effect of acquisitions):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,754

)

 

 

(34,536

)

Inventories

 

 

(18,451

)

 

 

1,244

 

Prepaid expenses and other current assets

 

 

(2,178

)

 

 

325

 

Income taxes

 

 

(2,095

)

 

 

(2,811

)

Accounts payable

 

 

2,393

 

 

 

2,931

 

Accrued payroll and incentives

 

 

(1,218

)

 

 

7,874

 

Accrued profit sharing

 

 

(1,594

)

 

 

1,710

 

Accrued expenses

 

 

5,004

 

 

 

4,044

 

Accrued warranty

 

 

(262

)

 

 

(248

)

Other assets

 

 

1,059

 

 

 

(119

)

Other non-current liabilities

 

 

(1,088

)

 

 

(1,087

)

Net cash provided by operating activities

 

 

109,524

 

 

 

73,743

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(211,069

)

 

 

 

Refunds on machinery and equipment

 

 

2,776

 

 

 

4,222

 

Receipts from note receivable

 

 

58

 

 

 

56

 

Payments to acquire patents and software

 

 

(515

)

 

 

(248

)

Proceeds from sale of property and equipment

 

 

 

 

 

61

 

Payments to acquire property and equipment

 

 

(28,952

)

 

 

(22,933

)

Net cash used in investing activities

 

 

(237,702

)

 

 

(18,842

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from loans and notes payable

 

 

50,000

 

 

 

105,000

 

Cash paid for debt issuance costs

 

 

(525

)

 

 

(1,024

)

Payments on capital lease obligation

 

 

(397

)

 

 

(447

)

Payments on notes payable

 

 

(54,725

)

 

 

(103,150

)

Proceeds from Economic Development Incentive Program

 

 

101

 

 

 

 

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

 

 

1,141

 

 

 

6,668

 

Payment of employee withholding tax related to restricted stock units

 

 

(4,443

)

 

 

(2,073

)

Excess tax benefit of stock-based compensation

 

 

 

 

 

3,123

 

Net cash (used in)/provided by financing activities

 

 

(8,848

)

 

 

8,097

 

Net increase/(decrease) in cash and cash equivalents

 

 

(137,026

)

 

 

62,998

 

Cash and cash equivalents, beginning of period

 

 

191,279

 

 

 

42,222

 

Cash and cash equivalents, end of period

 

$

54,253

 

 

$

105,220

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

6,683

 

 

$

12,118

 

Income taxes

 

 

63,195

 

 

 

31,484

 

 

 

 

 

 

 

 

 

 

7


 

AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Non-cash Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended January 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

$

 

3,426

 

$

 

 

 

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

 

 

 

8


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2017 and 2016

 

(1) Organization:

We are one of the world’s leading providers of firearms and quality products for the shooting, hunting, and rugged outdoor enthusiast. We manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and single shot rifles), handcuffs, and firearm-related products and accessories for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, and law enforcement and security agencies and officers in the United States and throughout the world. We are also a leading provider of outdoor products & accessories, including, reloading, gunsmithing, gun cleaning supplies, tree saws, laser sights, tactical lights, tools and knives, flashlights, soft goods, survival and camping equipment, and vault accessories.

On December 13, 2016, our stockholders approved a change in the name of our holding company from Smith & Wesson Holding Corporation to American Outdoor Brands Corporation, which became effective on January 1, 2017.  

We manufacture firearm components at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut and develop, assemble, and market our firearm products in our Springfield, Massachusetts facility. We develop, source, market, and distribute our outdoor and accessories products at our facilities in Columbia, Missouri; Kingsport, Tennessee; and Jacksonville, Florida. We develop, market, and assemble our electro-optics products in our Wilsonville, Oregon facility. We sell our products under a variety of brands, including Smith & Wesson®, M&P®, Thompson/Center ArmsTM, Crimson Trace®, Caldwell® Shooting Supplies, Wheeler® Engineering, Tipton® Gun Cleaning Supplies, Frankford Arsenal® Reloading Tools, Lockdown® Vault Accessories, HooymanTM Premium Tree Saws, BOG-POD®, Golden Rod® Moisture Control, Schrade®, Old Timer®, Uncle Henry®, and ImperialTM, USTTM, and Key Gear®. We plan to continue to capitalize on the goodwill developed through our historic 164 year old “Smith & Wesson” brand as well as our other well-known brands by expanding consumer awareness of the products we produce.

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., which we refer to collectively as the 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 January 31, 2017, the condensed consolidated statements of income and comprehensive income for the three and nine months ended January 31, 2017 and 2016, the condensed consolidated statement of changes in stockholders’ equity for the nine months ended January 31, 2017, and the condensed consolidated statements of cash flows for the nine months ended January 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 January 31, 2017 and for the periods presented, have been included. All significant intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2016 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, 2016. The results of operations for the nine months ended January 31, 2017 may not be indicative of the results that may be expected for the year ending April 30, 2017, 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). The core principle of ASU No. 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 No. 2014-09 is effective for interim reporting periods beginning October 1, 2017. In August 2015, the FASB issued ASU No. 2015-14 that deferred the effective date for ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Additionally, in March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain narrow areas and adds some practical expedients.

9


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2017 and 2016

 

The effective dates for these ASUs is the same as the effective date for ASU No. 2014-09. We are currently evaluating the impact that these ASUs will have on our condensed consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Inventory - Simplifying the Measurement of Inventory (Topic 330), 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 No. 2015-11 is effective for periods beginning after December 15, 2016, and early adoption is permitted. The new guidance must be applied prospectively. We are currently evaluating the impact that ASU No. 2015-11 will have on our condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), 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 annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact that ASU No. 2016-02 will have on our condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which includes multiple amendments intended to simplify aspects of share-based payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The amendments of this ASU are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning December 15, 2018, and early adoption is permitted. We have elected to early adopt this standard during the nine months ended January 31, 2017 and prospectively present the change to the financial statements given the immaterial nature of this adoption to our condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds it fair value, not to exceed the amount of the goodwill. The requirements of this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact that ASU No. 2017-04 will have on our condensed consolidated financial statements.  

 

 

(3) Acquisitions

 

In August 2016, we acquired substantially all of the net assets of Taylor Brands, LLC as well as all of the issued and outstanding stock of Crimson Trace Corporation for an aggregate of $178.1 million, net of cash acquired, subject to certain adjustments, utilizing cash on hand. Taylor Brands, LLC, based in Kingsport, Tennessee, is a designer and distributor of high-quality knives, specialty tools, and accessories and a licensee of our wholly owned subsidiary, Smith & Wesson Corp. Crimson Trace Corporation, based in Wilsonville, Oregon, is a leading provider of laser sight and tactical light products for consumers, law enforcement, security agencies, and military agencies around the globe.

 

On November 18, 2016, we acquired substantially all of the net assets of Ultimate Survival Technologies, Inc. for $33.0 million, subject to certain adjustments, utilizing cash on hand. In addition, 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 liability was established in accordance with ASC 805 — Business Combinations. As of January 31, 2017, the contingent liability was recorded at a fair value of $1.7 million, of which, $900,000 was recorded as a current liability. Ultimate Survival Technologies, Inc., based in Jacksonville, Florida, is a provider of high-quality survival and camping equipment, including LED lights, patented all-weather fire starter kits, unbreakable signal mirrors, premium outdoor cutting tools, first aid kits, survival kits, and camp kitchen products.

 

We are finalizing the valuations of the assets acquired and liabilities assumed related to the Acquisitions. Therefore, the fair values set forth herein 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 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 and the related tax impacts of any changes made. During the three months ended January

10


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2017 and 2016

 

31, 2017, goodwill was decreased by $329,000, primarily as a result of inventory valuation adjustments relating to the Taylor Brands, LLC and Crimson Trace Corporation acquisitions.

 

The following table summarizes the estimated preliminary allocation of the purchase price for Taylor Brands, LLC and Crimson Trace Corporation combined (in thousands):

 

 

October 31, 2016 (As Initially Reported)

 

 

Measurement Period Adjustments

 

 

October 31, 2016 (As Adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

$

 

8,937

 

 

 

 

(83

)

 

 

 

8,854

 

Inventories

 

 

24,359

 

 

 

 

588

 

 

 

 

24,947

 

Other current assets

 

 

379

 

 

 

 

(79

)

 

 

 

300

 

Property, plant, and equipment

 

 

6,851

 

 

 

 

 

 

 

 

6,851

 

Intangibles

 

 

84,100

 

 

 

 

 

 

 

 

84,100

 

Goodwill

 

 

80,893

 

 

 

 

(329

)

 

 

 

80,564

 

Total assets acquired

 

 

205,519

 

 

 

 

97

 

 

 

 

205,616

 

Accounts payable

 

 

5,066

 

 

 

 

 

 

 

 

5,066

 

Accrued expenses

 

 

946

 

 

 

 

68

 

 

 

 

1,014

 

Accrued payroll

 

 

689

 

 

 

 

 

 

 

689

 

Accrued income taxes

 

 

3

 

 

 

 

29

 

 

 

32

 

Accrued warranty

 

98

 

 

 

 

 

 

 

 

98

 

Deferred income taxes

 

 

20,658

 

 

 

 

 

 

 

 

20,658

 

Total liabilities assumed

 

 

27,460

 

 

 

 

97

 

 

 

 

27,557

 

 

$

 

178,059

 

 

$

 

 

 

$

 

178,059

 

 

 

The following table summarizes the estimated preliminary allocation of the purchase price for Ultimate Survival Technologies, Inc. (in thousands):

 

 

As of November 18, 2016

 

 

 

 

 

 

Accounts receivable

$

 

2,698

 

Inventories

 

 

6,910

 

Other current assets

 

 

51

 

Property, plant, and equipment

 

 

1,381

 

Intangibles

 

 

13,750

 

Goodwill

 

 

11,908

 

Total assets acquired

 

 

36,698

 

Accounts payable

 

 

1,148

 

Accrued expenses

 

 

27

 

Accrued payroll

 

 

811

 

Accrued income taxes

 

 

3

 

Total liabilities assumed

 

 

1,989

 

 

$

 

34,709

 

 

 

Included in general and administrative costs are $3.8 million of acquisition-related costs incurred during the nine months ended January 31, 2017 for the Acquisitions. The Acquisitions generated $19.6 million and $38.2 million of revenue during the three and nine months ended January 31, 2017, respectively.

11


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2017 and 2016

 

 

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 Acquisitions and their respective weighted average lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

Amount

 

 

 

Life (In years)

 

Developed technology

$

 

3,000

 

 

 

 

4.1

 

Customer relationships

 

 

76,600

 

 

 

 

5.1

 

Trade names

 

 

17,000

 

 

 

 

4.8

 

Order backlog

 

 

1,150

 

 

 

 

0.3

 

Non-competition agreement

 

 

100

 

 

 

 

3.4

 

 

$

 

97,850

 

 

 

 

 

 

 

Additionally, the following table reflects the unaudited pro forma results of operations assuming that the Acquisitions had occurred on May 1, 2015 (in thousands, except per share data):

 

 

For the Three

 

 

For the Three

 

 

For the Nine

 

 

For the Nine

 

 

Months Ended

 

 

Months Ended

 

 

Months Ended

 

 

Months Ended

 

 

January 31, 2016

 

 

January 31, 2017

 

 

January 31, 2016

 

 

January 31, 2017

 

Net sales

$

 

232,021

 

 

$

 

234,948

 

 

$

 

570,298

 

 

$

 

705,061

 

Income from operations

 

 

49,050

 

 

 

 

48,817

 

 

 

 

91,138

 

 

 

 

153,091

 

Net income per share - diluted

 

 

0.58

 

 

 

 

0.57

 

 

 

 

1.10

 

 

 

 

1.81

 

 

 

The unaudited pro forma income from operations for the three and nine months ended January 31, 2017 and 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 incurred as if the Acquisitions had occurred on May 1, 2015. The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the actual results that would have been achieved had the 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 nine months ended January 31, 2017 by reporting segment are as follows:

 

 

 

 

Firearms

 

 

 

Outdoor Products &

 

 

 

Total

 

 

 

 

 

Segment

 

 

 

Accessories Segment

 

 

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of April 30, 2016

 

$

 

13,770

 

 

$

 

62,587

 

 

$

 

76,357

 

 

Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of July 31, 2016

 

 

 

13,770

 

 

 

 

62,587

 

 

 

 

76,357

 

 

Acquisitions

 

 

 

 

 

 

 

80,893

 

 

 

 

80,893

 

 

Balance as of October 31, 2016

 

$

 

13,770

 

 

$

 

143,480

 

 

$

 

157,250

 

 

Adjustments

 

 

 

 

 

 

 

(329

)

 

 

 

(329

)

 

Acquisitions

 

 

 

 

 

 

 

11,908

 

 

 

 

11,908

 

 

Balance as of January 31, 2017

 

$

 

13,770

 

 

$

 

155,059

 

 

$

 

168,829

 

 

 

Refer to Note 11 — Segment Information below for more detail.  

 

 

12


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2017 and 2016

 

(5) Notes Payable:

Credit Facilities – On October 27, 2016, we and certain of our domestic subsidiaries entered into a second amendment to our existing unsecured credit agreement, or the Second Amendment, with TD Bank, N.A. and other lenders, or the Lenders. Among other things, the Second Amendment increased the revolving line of credit, or the Revolving Line, available from our lenders 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 payable in the condensed consolidated balance sheet.

On June 15, 2015, we entered into an unsecured credit facility, or the Credit Agreement, with the Lenders, which included a $175.0 million Revolving Line and a $105.0 million term loan, or the Term Loan, of which $95.6 million was outstanding as of January 31, 2017. As described above, 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. As of January 31, 2017, we had no borrowings outstanding on the Revolving Line. Had there been borrowings, they would have borne an interest rate of 4.00% per annum if we had selected the prime rate option and a range of 2.27% to 2.52% per annum if we had selected the LIBOR rate option. 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 incurred $1.0 million of debt issuance costs related to our new credit facility, which are included in notes payable in the accompanying condensed consolidated balance sheet.  

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 January 31, 2017, our interest rate on the Term Loan was 3.06%.

As of January 31, 2017, the interest rate swap was considered effective and had no effect on earnings. The fair value of the interest rate swap on January 31, 2017 was an asset of $641,000 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 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, 2016, 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 (a) 102.500% of the principal amount of the 5.000% Senior Notes to be redeemed, if redeemed during the 12-month period beginning on July 15, 2016; or (b) 100% of the principal amount of the 5.000% Senior Notes to be redeemed, if redeemed during the 12-month period beginning on July 15, 2017, plus, in either case, accrued and unpaid interest on the 5.000% Senior Notes 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

13


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2017 and 2016

 

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 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 January 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, 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 equivalents, which are measured at fair value on a recurring basis, totaled $54.3 million and $191.3 million as of January 31, 2017 and April 30, 2016, 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 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 approximates the fair value as of January 31, 2017