Business context and reporting period
This is American Outdoor Brands Corporation’s unaudited Form 10-Q for the three and six months ended October 31, 2019 (fiscal Q2 and first half of fiscal 2020). The company operated Firearms and Outdoor Products & Accessories segments. Although the request identifies Smith & Wesson Brands, Inc., the filing is for American Outdoor Brands Corporation; Smith & Wesson Brands was the proposed name for the firearms company after a planned spin-off.
Financial performance
Amounts are in U.S. dollars; figures below are rounded to millions unless stated otherwise.
| Metric | Three months ended Oct. 31, 2019 | Six months ended Oct. 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Net sales | $154.4m | $278.1m | $161.7m / $300.5m |
| Gross profit; margin | $50.3m; 32.6% | $98.2m; 35.3% | $56.4m; 34.9% / $108.8m; 36.2% |
| Operating income; margin | $4.9m; 3.2% | $6.0m; 2.2% | $11.3m; 7.0% / $24.8m; 8.3% |
| Net income (loss); diluted EPS | $1.3m; $0.02 | ($0.8m); ($0.01) | $6.7m; $0.12 / $14.3m; $0.26 |
| Operating cash flow | Not reported separately | ($34.6m) | $9.1m for six months |
First-half cash used in investing was $9.4m and cash provided by financing was $46.8m. Cash increased $2.8m to $43.8m. The operating cash outflow mainly reflected a $37.4m inventory build, higher receivables, and payment of incentive compensation.
At October 31, 2019, current assets were $353.1m and current liabilities were $170.2m. Inventory was $201.2m, up from $163.8m at April 30. Notes and loans payable totaled $202.8m, including $75.0m classified as current; finance lease liabilities totaled approximately $41.3m. The company had $50.0m drawn on its revolving credit line, $78.2m outstanding on its term loan, and $75.0m of 5% senior notes. It reported compliance with debt covenants and said available resources and credit facilities were expected to cover operations and commitments for the next 12 months.
Material changes versus the prior comparable periods
- Second-quarter sales declined 4.5%; first-half sales declined 7.5%. First-half operating income fell 75.7%, and the company shifted from $14.3m of first-half net income to a $0.8m net loss.
- In Q2, Firearms external revenue increased to $112.9m from $111.0m, while Outdoor Products & Accessories revenue fell to $41.5m from $50.7m. Across the first half, segment revenue was $207.4m for Firearms and $70.6m for Outdoor Products & Accessories, versus $215.5m and $85.1m, respectively, in 2018.
- Handgun shipments grew in Q2, but long-gun shipments fell 28.4%. Management attributed weaker long-gun sales to reduced bolt-action rifle sales and pricing pressure on modern sporting rifles. Outdoor segment sales were affected by lower orders from two significant customers and, for the first half, shipment timing with a significant customer.
- First-half operating expenses rose 9.7% to $92.1m, with selling, marketing, and distribution costs up $9.2m, including costs associated with the new distribution center. Interest expense increased $1.4m to $5.7m.
Outlook, commentary, risks and unusual items
- Federal excise tax presentation: Following the new distribution center’s opening, the company began assessing federal excise tax when firearms were transferred to the center, rather than at sale to third-party customers. This increased Q2 sales and cost of sales by $8.1m without changing gross-profit dollars; management said it reduced consolidated gross margin by about 1.8 percentage points. For the first half, the change added $10.6m to revenue. Comparisons of reported sales and margins are affected by this accounting/timing change.
- Spin-off plan: The board approved proceeding with a proposed tax-free spin-off of Outdoor Products & Accessories, expected in the second half of calendar 2020, subject to approvals and other conditions. The plan would create separate firearms and outdoor-products companies. Estimated restructuring, advisory, reorganization, and start-up charges are $9m–$12m. A November 2019 credit agreement amendment provided lender consent subject to conditions, including collateral and a smaller revolving commitment at the spin-off.
- Debt events after quarter-end: The $78.2m term loan was repaid on November 19, 2019 using revolving-credit borrowings; the related interest-rate swap was terminated. On December 5, the company gave notice that it intended to redeem the $75m senior notes on January 6, 2020.
- Operating outlook and risks: Management expected inventory to decline during fiscal Q3 after seasonal and product-transition builds, but cautioned that excess company or distributor inventory could pressure future results and that demand is difficult to forecast. Fiscal 2020 capital expenditures were expected to be $20m–$25m. Risks discussed include product demand and channel inventory, promotional pricing, tariffs and input costs, manufacturing absorption, regulation and political pressures, litigation, and execution and financing of the spin-off and logistics operations.
- Legal matters: The filing describes product-liability claims and several other lawsuits, including a Gemtech acquisition dispute seeking $18.6m and claims involving firearm products. The company said it intended to defend the matters, had accrued defense costs, and could not estimate a range of reasonably possible additional losses for material adverse judgments.
Important facts for investors to verify
- Confirm the filing entity and period: this is American Outdoor Brands Corporation’s Q2 fiscal 2020 report, not a filing under the later Smith & Wesson Brands name.
- Track the proposed spin-off’s completion, costs, approvals, debt conditions, and allocation or sublease of the Missouri logistics facility.
- Assess whether inventory levels and distributor orders normalize, particularly for long guns and Outdoor Products & Accessories, and whether significant-customer order timing rebounds.
- Reconcile the federal excise tax presentation change when comparing revenue and margins with prior periods; reported sales rose without a corresponding gross-profit benefit.
- Verify post-quarter debt transactions, remaining revolver capacity, senior-note redemption, and future cash needs, including capital spending and spin-off costs.
- Monitor litigation developments and any new estimate or accrual for potential losses; the filing does not provide a clear estimate of additional reasonably possible losses.