Business context and reporting period
American Outdoor Brands Corporation (AOBC), the issuer named in this filing, reported its fiscal third quarter and first nine months ended January 31, 2020. Its businesses were Firearms and Outdoor Products & Accessories. The company was planning to separate the outdoor business; the proposed firearms company was expected to be named Smith & Wesson Brands, Inc.
Key financial metrics
Amounts are in millions of dollars except per-share data. The three-month and nine-month figures are compared with the corresponding 2019 periods.
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $166.7, up 2.9% | $444.8, down 3.8% |
| Gross profit / margin | $55.2 / 33.1%, versus $54.1 / 33.4% | $153.4 / 34.5%, versus $162.9 / 35.2% |
| Operating income | $10.9, versus operating loss of $2.0 | $16.9, down 25.6% |
| Net income (loss) | $5.7, or $0.10 diluted per share; prior-year loss of $5.7, or $(0.10) per share | $4.9, or $0.09 diluted per share; down from $8.6, or $0.16 per share |
| Cash flow from operations | Not presented separately for the quarter | $(25.0), versus $20.7 provided |
Federal excise tax treatment increased reported sales and cost of sales by $10.1 million in the quarter and $20.8 million year to date, without increasing gross profit dollars. It reduced reported gross margin by 240 basis points in the quarter and 170 basis points year to date. Excluding this effect, consolidated gross margin was 35.3% for the quarter and 36.2% year to date.
Balance sheet and liquidity at January 31, 2020
- Cash and cash equivalents: $46.1 million; current assets: $363.8 million; current liabilities: $95.3 million.
- Notes and loans payable: $199.0 million, including $200.0 million drawn on the revolving credit facility; the difference reflects reported debt presentation and other items.
- Finance lease liabilities: $41.2 million. The Missouri logistics facility lease accounts for most of this obligation.
- Inventory was $201.5 million, up from $163.8 million at April 30, 2019.
- Management said available capital resources and credit facilities were expected to fund operations and commitments for at least the next 12 months. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Quarterly sales rose 2.9%, primarily reflecting higher handgun sales and the federal excise tax accounting change. Handgun revenue rose 12.0%; long-gun revenue fell 18.4%.
- Year-to-date sales fell 3.8%. Firearms revenue declined 1.2%, with lower modern sporting rifle and hunting rifle sales partly offset by handguns. Outdoor Products & Accessories revenue declined 8.0%, reflecting lower sales in laser, shooting, hunting, and camping-related categories.
- The prior-year quarter included a $10.4 million non-cash goodwill impairment charge. The improvement to quarterly operating income and net income therefore is not directly comparable without considering that charge. For the nine-month period, net income also declined despite the prior-year impairment.
- Operating cash flow swung to a $25.0 million use, affected by lower profits, inventory investment, federal excise tax in inventory, and reductions in payroll accruals and accounts payable.
- The company adopted lease accounting guidance effective May 1, 2019, recognizing operating lease right-of-use assets and liabilities; this adoption did not affect retained earnings.
Outlook, management commentary, risks and unusual items
- The proposed tax-free spin-off was targeted for the second half of calendar 2020, subject to board, regulatory, tax, and legal approvals. Expected related restructuring and start-up costs were $9 million to $12 million; $1.2 million had been recorded through January 31, 2020.
- Fiscal 2020 capital expenditures were expected to be $15 million to $20 million. Management expected seasonal inventory to decline in the fourth fiscal quarter.
- The company redeemed $75 million of 5% senior notes in January 2020 and repaid its $105 million term loan in November 2019, using revolving-line borrowings. The revolving line carried a 3.92% rate at quarter-end; its maturity was October 2021. Spin-off consent conditions include collateral and a reduction in the revolver commitment to $250 million.
- On January 14, 2020, Mark P. Smith and Brian D. Murphy became co-presidents and co-CEOs, succeeding James Debney. A February 2020 separation agreement was expected to add about $1.6 million to fourth-quarter general and administrative expense.
- Management cited excess channel inventory, weak modern sporting rifle demand and promotional pressure, retailer concentration and private-label competition, tariffs, and possible supply interruptions in China as risks. It believed inventory could mitigate near-term coronavirus-related disruption, while warning that worsening conditions could affect future sales and profitability.
- Litigation includes product-liability matters, a Gemtech acquisition dispute seeking $18.6 million, and other commercial and firearm-related cases. The company said it could not reasonably estimate the range of additional losses for material adverse judgments and had not accrued for such judgments.
- Despite higher quarterly sales, the excise-tax accounting change inflated reported sales and reduced the reported margin percentage. The company also reported $25.0 million of operating cash outflow and rising inventory.
Important facts for investors to verify
- Whether the spin-off proceeds on the proposed timetable, its final financing and lease arrangements, and total separation costs.
- Whether inventory and distributor stock levels normalize, especially for firearms, and whether handgun demand translates into shipments.
- Underlying margins and sales trends after adjusting for the federal excise tax presentation change and the distribution-center shift in shipping costs.
- Cash conversion, debt balances, borrowing costs, covenant headroom, and the facility’s reduced capacity after the proposed spin-off.
- Developments in litigation, retailer/customer exposure, tariffs, and China-related supply risks; the filing does not provide a clear estimate of possible additional litigation losses.