Business context and reporting period
American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, filed this unaudited Form 10-Q for the fiscal quarter and nine months ended January 31, 2017. The holding-company name change took effect January 1, 2017. The business reports Firearms and Outdoor Products & Accessories segments. Results include Taylor Brands, Crimson Trace, and Ultimate Survival Technologies (UST) only from their respective acquisition dates.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Jan. 31, 2017 | Three months ended Jan. 31, 2016 | Nine months ended Jan. 31, 2017 | Nine months ended Jan. 31, 2016 |
|---|---|---|---|---|
| Net sales | $233.5 | $210.8 | $674.0 | $501.8 |
| Gross profit / margin | $99.3 / 42.5% | $86.7 / 41.1% | $284.5 / 42.2% | $201.7 / 40.2% |
| Operating income / margin | $50.2 / 21.5% | $50.1 / 23.8% | $154.9 / 23.0% | $101.7 / 20.3% |
| Net income | $32.5 | $31.4 | $100.2 | $58.3 |
| Diluted EPS | $0.57 | $0.56 | $1.75 | $1.05 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $109.5 | $73.7 |
- Quarterly sales rose 10.8%, but operating income was essentially flat as operating expenses grew 34.5%; quarterly operating margin declined 2.3 percentage points.
- Nine-month sales increased 34.3% and net income increased 71.8%. Firearms revenue rose 30.2%; Outdoor Products & Accessories revenue rose 68.8%, including $38.2 million from acquisitions. Organic growth in that segment was 4.8% for the quarter but declined 2.9% for the nine months.
- Cash and cash equivalents were $54.3 million at January 31, 2017, down from $191.3 million at April 30, 2016. Current assets were $262.6 million and current liabilities $134.5 million.
- Cash used in investing was $237.7 million, including $211.1 million for acquisitions; capital expenditures were $29.0 million. Operating cash flow less capital expenditures was approximately $80.6 million.
- Notes payable totaled $168.3 million carrying value, including $6.3 million current and $162.0 million long-term. The company reported a $95.6 million term-loan balance and $75 million of 5.000% senior notes due in 2018. Its $350 million revolving facility had no borrowings; $1.0 million of letters of credit was outstanding.
Material changes and notable items
- Acquisitions materially expanded outdoor/accessory offerings and increased goodwill to $168.8 million and net intangibles to $147.0 million. Purchase-price allocations remained preliminary. UST consideration included up to an additional $2.0 million contingent on performance; the recorded fair value was $1.7 million at January 31, 2017.
- Inventory increased to $128.1 million from $77.8 million at April 30, 2016. Management attributed the build partly to preparation for trade-show-season orders and cautioned that inventory could rise further if expected orders did not materialize.
- Nine-month earnings included acquisition-related costs of $3.8 million. Acquisition-related inventory step-up and backlog costs were $4.6 million for the nine months. Management said acquisition-related expenses reduced diluted EPS by $0.16 for the nine months and $0.05 for the quarter.
- The nine-month interest expense comparison benefited from the prior-year refinancing and related absence of a $2.9 million bond call premium and $1.7 million debt-issuance-cost write-off incurred in the prior-year period.
Outlook, risks and contingencies
- Management reported weaker firearms demand late in the quarter: adjusted NICS checks in December and January declined approximately 20% year over year, with handguns down 29%. It cited prior-year news-driven demand and a softer retail environment, potentially related to reduced political pressure around firearm laws. Management said softness could continue for several months.
- After quarter-end, the company began adjusting firearm output to potential softer demand, including reducing reliance on outsourcing. Management cautioned that changes may not prevent temporary inventory accumulation and that trade-show-season orders may be weaker than usual.
- Management expected approximately $40 million of fiscal 2017 capital expenditures and stated existing resources and credit facilities should fund operations and commitments for the next 12 months. No specific revenue or earnings guidance was provided.
- The company was in compliance with debt covenants at January 31, 2017. The term loan’s effective rate was 3.06%; management did not expect the interest-rate swap to materially affect earnings over the next 12 months.
- The filing identifies five product-liability cases and eight additional claims, as well as other litigation. The company could not estimate a range of reasonably possible additional losses from material adverse judgments; it stated that an unfavorable outcome or prolonged litigation could harm the business.
- An environmental reserve of $0.718 million was recorded. Management did not expect known environmental matters to materially affect results, but noted uncertainty around future requirements and remediation obligations.
Important facts for investors to verify
- Whether firearms demand and retailer orders stabilized after the December–January decline, and whether management’s production actions contained inventory growth.
- Acquisition performance, organic growth, integration costs, and any final purchase-accounting adjustments or UST contingent payments.
- Inventory quality and turnover, cash generation, and the company’s ability to fund planned capital spending while maintaining liquidity.
- Debt balances, covenant compliance, and the 2018 maturity of the 5.000% senior notes.
- Developments in product-liability litigation and environmental remediation, including any loss estimates or reserve changes.