Business context and reporting period
American Outdoor Brands Corporation, which marketed products including Smith & Wesson firearms, filed this unaudited Form 10-Q for the quarter and six months ended October 31, 2017 (fiscal 2018). Its two reportable segments were Firearms and Outdoor Products & Accessories.
Key financial metrics
Amounts are in millions of dollars except per-share data. Comparisons are with the prior-year periods.
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $148.4; down 36.4% | $277.4; down 37.0% |
| Gross profit / margin | $50.8 / 34.2%, versus $97.6 / 41.8% | $91.4 / 33.0%, versus $185.2 / 42.0% |
| Operating income / margin | $8.0 / 5.4%, versus $52.2 / 22.3% | $4.8 / 1.7%, versus $104.7 / 23.8% |
| Net income / diluted EPS | $3.2 / $0.06, versus $32.5 / $0.57 | $1.1 / $0.02, versus $67.7 / $1.18 |
| Operating cash flow | Not presented by quarter | $(30.7), versus $61.4 provided |
At October 31, cash was $68.2; current assets were $347.8 and current liabilities $181.8. Inventory was $178.9, up from $131.7 at April 30. Balance-sheet notes and loans payable totaled $289.3, including $81.3 current and $208.0 noncurrent. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Firearms external sales fell 48.4% in the quarter and 48.6% for six months. Quarterly handgun sales declined 51.4% and long-gun sales 44.6%.
- Outdoor Products & Accessories external sales rose 23.2% in the quarter and 47.0% for six months, substantially reflecting acquired businesses. Six-month organic segment revenue grew 12.0%; quarterly organic revenue was flat.
- Firearms gross margin was 29.1% for the quarter and 28.2% for six months, pressured by lower volume, promotional discounts and rebates, and unfavorable fixed-cost absorption; six-month results also included inventory valuation adjustments. Outdoor segment gross margin was 44.9% and 44.8%, respectively.
- Six-month operating cash use reflected a $42.6 increase in inventory, payments of payroll incentives and profit sharing, and lower accrued expenses; reduced receivables partly offset those uses.
Outlook, commentary, risks and unusual items
- Management attributed weaker firearm orders to excess inventories across manufacturers, softer consumer demand and lower adjusted NICS checks (down 15.0% for the quarter and 13.2% for six months). It also cited elevated prior-year demand around news and political events, and promotions in fiscal Q4 2017 that may have pulled shipments forward.
- The company reduced outsourced firearm-parts manufacturing and production at some facilities. Management expected inventory to decline in the second half of fiscal 2018, supported by production cuts, seasonal hunting and holiday demand, new products and distributor buying shows. This was an expectation, not quantified guidance; management noted distributor inventory and demand are difficult to forecast.
- August acquisitions of Gemtech and Bubba Blade cost approximately $23.0 million in aggregate. Purchase-price allocations remained preliminary. Potential earn-outs were recorded at $0.1 million for Gemtech (maximum $17.1 million) and $0.4 million for UST; the $1.3 million UST fair-value reduction increased six-month other income.
- A 632,000-square-foot distribution center lease was signed in October. Its 20-year initial term is expected to commence in the second half of fiscal 2019; estimated annual lease expense is $3.3–$3.5 million. Building cost is estimated at $45–$50 million, with another $25–$30 million of related projects expected over two fiscal years.
- The company disclosed five product-liability lawsuits and seven additional claims, along with a legacy municipal suit. It said it could not reasonably estimate a range of possible additional losses from material adverse judgments; it had reserves for defense costs.
- Revenue-standard adoption was planned for May 1, 2018; the company had not yet estimated its financial-statement impact. Management said existing capital resources and credit facilities were expected to cover operations and commitments for the next 12 months.
Important facts for investors to verify
- Revolver balance: the debt footnote reports $125.0 million outstanding at October 31, 2017, while MD&A states $75.0 million. Confirm the correct borrowing and available capacity; the filing identifies a $350 million revolving commitment.
- Debt maturities and liquidity: verify the $75 million 5.000% senior notes due July 2018, term-loan obligations, covenant headroom, and funding needs alongside the distribution-center commitments.
- Inventory normalization: track internal and distributor firearm inventories, production reductions, sell-through and whether management’s second-half inventory-decline expectation materializes.
- Acquisition performance and accounting: monitor acquired-business revenue, preliminary purchase-price allocations, contingent consideration and related amortization.
- Litigation and lease exposure: review updates to product-liability claims and the distribution-center project’s costs, timing and lease accounting.