American Outdoor Brands Corporation — Q1 Fiscal 2020 Form 10-Q
The filing is for the three months ended July 31, 2019, compared with the three months ended July 31, 2018. The registrant’s name in the filing is American Outdoor Brands Corporation; its common stock traded as AOBC. The company reported Firearms and Outdoor Products & Accessories segments.
Financial results and liquidity
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Net sales | $123.7 million | $138.8 million |
| Gross profit / margin | $47.9 million / 38.7% | $52.4 million / 37.8% |
| Operating income / margin | $1.1 million / 0.9% | $13.5 million / 9.7% |
| Net income (loss) | $(2.1) million; $(0.04) per diluted share | $7.6 million; $0.14 per diluted share |
| Cash from operating activities | $(29.1) million | $10.6 million |
| Cash from investing activities | $(3.8) million | $(7.1) million |
| Cash from financing activities | $22.7 million | $(27.2) million |
- Sales fell 10.9%. Firearms segment revenue was $95.4 million, down 9.3%; Outdoor Products & Accessories revenue was $33.2 million, down 10.8%.
- Firearms gross margin increased to 37.1% from 33.1%; Outdoor Products & Accessories margin declined to 42.4% from 45.3%.
- At July 31, cash was $30.7 million and current assets were $307.9 million, versus current liabilities of $164.4 million. Inventory was $195.4 million, up from $163.8 million at April 30.
- Notes and loans payable totaled approximately $179.3 million: $79.8 million current and $99.5 million long-term. Separately, finance lease liabilities were $41.6 million. The company also had $11.5 million of operating lease liabilities.
- The company drew $25.0 million on its revolving credit facility during the quarter. The term loan balance was $79.8 million; the $75.0 million senior notes mature August 28, 2020. The company reported compliance with debt covenants.
Material changes and management commentary
- Lower demand and channel inventory buildup weighed on firearm orders. Handgun revenue declined 7.6% and long-gun revenue declined 22.8%; the company cited lower revolver and modern sporting rifle demand, product mix, and promotional activity.
- Outdoor segment sales were affected by prioritizing firearm shipments from the Missouri campus, weaker sales of certain shooting, hunting, and survival products, and higher tariffs. New products represented 14.7% of firearm revenue and 20.6% of Outdoor Products & Accessories revenue.
- Consolidated gross margin improved 90 basis points, which management attributed mainly to favorable inventory valuation adjustments and manufacturing fixed-cost absorption. This was more than offset at the operating-income level by lower sales and higher operating expenses, including distribution, advertising, compensation, depreciation, and professional fees.
- Operating cash flow deteriorated largely due to a $31.7 million inventory build, lower payroll and incentive accruals, lower accounts payable, and reduced accrued expenses and deferred revenue. Management expected firearms inventory to remain flat or increase slightly in Q2 and Outdoor Products & Accessories inventory to decline.
- The company adopted lease accounting guidance on May 1, 2019, recognizing $11.5 million of operating right-of-use assets and $12.8 million of lease liabilities. Management estimated fiscal 2020 capital expenditures of $25–$30 million, down from $33.9 million in fiscal 2019.
Outlook, risks, and contingencies
Management stated that cash, working capital, operating plans, and credit facilities should be adequate to fund operations, debt, and other commitments for the next 12 months. The filing gives no revenue or earnings guidance. Management cautioned that excess company and distributor inventories may pressure future results and that demand is difficult to forecast because of seasonality, new products, news and political events, and consumer preferences.
- The 633,000-square-foot Missouri logistics facility was completed in November 2018 and was expected to become fully operational over the remainder of fiscal 2020. The company cited transition-related shipment disruption risk, added operating costs, and a long-term finance lease obligation.
- Litigation includes the Gemini dispute, seeking $18.6 million; product-liability claims and cases; the City of Gary firearm litigation; a Parkland-related declaratory action; and a competitor’s trade-dress and consumer-protection lawsuit filed July 31, 2019. A separate Primus Group action was filed in August 2019. The company disputes the claims; it said it could not estimate a range of reasonably possible additional losses and had not accrued for material adverse judgments.
- Other risks include firearms regulation and political or social pressure, product demand and competition, raw-material availability and cost, tariffs, acquisition integration, and the ability to execute new-product and logistics plans.
Important facts for investors to verify
- Whether firearm and accessory demand stabilizes and distributor inventory levels decline.
- Whether the planned inventory build converts into sales without further material pressure on operating cash flow.
- Execution and costs of the Missouri logistics transition, alongside the $25–$30 million fiscal 2020 capital expenditure plan.
- Debt repayment or refinancing plans ahead of the term-loan and senior-note maturities in 2020, and continued covenant compliance.
- Developments in disclosed litigation, especially the Gemini claim and product-liability matters, for which potential additional losses were not estimable.