American Outdoor Brands Corporation — Form 10-Q Summary
Reporting period: Three months ended July 31, 2018, the company’s first quarter of fiscal 2019. The filing registrant is American Outdoor Brands Corporation, which includes Smith & Wesson firearms and outdoor-products businesses. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial results
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $138.8 million | $129.0 million | Up 7.6% |
| Gross profit / margin | $52.4 million / 37.8% | $40.6 million / 31.5% | Margin up 6.3 percentage points |
| Operating income (loss) / margin | $13.5 million / 9.7% | $(3.2) million / (2.5)% | Improved $16.7 million |
| Net income (loss) | $7.6 million | $(2.2) million | Improved $9.8 million |
| Diluted earnings (loss) per share | $0.14 | $(0.04) | Improved $0.18 |
| Operating cash flow | $10.6 million | $(34.5) million | Improved $45.1 million |
Firearms external sales were $104.5 million, up 6.2%; Outdoor Products & Accessories sales were $34.4 million, up 12.0%. Long-gun sales rose 35.6%, while handgun sales rose 1.6% despite handgun unit shipments declining 22.5%. Organic Outdoor Products & Accessories sales increased 8.1%; acquisitions contributed $1.2 million of segment sales.
Operating expenses fell 11.1% to $38.9 million, principally reflecting lower professional fees and compensation-related costs. Interest expense was $2.0 million, down $0.4 million. The effective tax rate was 33.3%, versus 49.6% in the prior-year quarter.
Balance sheet, cash flow and debt
- At July 31, 2018, cash and cash equivalents were $25.2 million, down from $48.9 million at April 30. Current assets were $243.9 million and current liabilities were $93.9 million.
- Inventories were $166.9 million, up from $153.4 million at fiscal year-end. Management attributed the build to seasonal preparation and planned stock accumulation ahead of the new logistics facility.
- Notes and loans payable totaled approximately $160.1 million on the balance sheet, including $6.3 million current; capital lease liabilities were $34.5 million in total. The company reported an $86.1 million Term Loan and $75.0 million of 5.0% senior notes due August 2020. No revolving-line borrowings were outstanding; the facility commitment was $350 million.
- Investing cash use was $7.1 million, including $6.9 million of property and equipment purchases. Financing cash use was $27.2 million, primarily reflecting $25.0 million of revolving-line repayments and Term Loan payments. Cash declined by $23.6 million during the quarter.
- The company said it was in compliance with debt covenants and expected existing resources and credit facilities to fund operations and commitments for the next 12 months. The Term Loan’s effective rate was 4.32%; its interest-rate swap had a $2.0 million fair-value asset.
Changes, outlook and significant items
- Revenue accounting adoption: The company adopted ASC 606 on May 1, 2018 using the modified retrospective approach; prior-year results were not restated. Recognition of previously deferred promotional revenue, net of new deferrals, increased current-quarter revenue by $9.7 million. The company said adoption reduced gross margin by 0.9 percentage points and increased EPS by $0.03. Opening retained earnings was reduced by $4.6 million.
- Sales and demand: Management cited lower promotional discounts and consumer rebates, favorable manufacturing spending, and stronger modern sporting-rifle demand as contributors to results. It also noted softer customer orders and lower consumer-channel shipments for certain handguns, alongside a 10.1% reduction in adjusted background checks. Distributor and internal inventory exceeding demand could hurt future results; management said demand is difficult to forecast because of seasonality, news and political events, new products, and consumer preferences.
- Capital spending and logistics: Fiscal 2019 capital expenditures were expected at $45–$50 million, including spending for the new national logistics facility; excluding that facility, expected spending was $20–$25 million. The facility building was estimated to cost $45–$50 million, with an additional $25–$30 million expected for equipment, IT, and related projects. Completion and operation were scheduled for fiscal 2019. Management identified execution and shipping-disruption risks around the transition.
- Restructuring: In August 2018, the company announced plans to close its Jacksonville facility and move UST operations to Columbia, Missouri. It expected $1.5–$2.5 million of restructuring charges, beginning in Q2 FY2019 and concluding in Q1 FY2020.
- Legal matters: Gemtech’s former owner appealed dismissal of a lawsuit seeking $18.6 million; the company disputed the claims. The filing also described product-liability matters and other litigation. Management said it could not reasonably estimate possible additional losses from material adverse judgments, and reported that it had accrued defense costs.
- Acquisitions and tax: The 2018 Gemtech and Bubba Blade acquisitions had an aggregate purchase price of $23.1 million. Management considered the Gemtech earn-out targets unlikely to be achieved. It expected an overall benefit from federal tax reform, while noting the estimate remained subject to change.
Investor verification priorities
- Separate underlying sales and profitability trends from ASC 606’s $9.7 million net revenue timing benefit and $0.03 EPS benefit; prior-year results were not restated.
- Track handgun shipments, distributor inventory, rebate levels, and whether long-gun demand and Outdoor Products growth continue.
- Verify execution, total cost, cash requirements, and operating readiness of the logistics facility, as well as the planned UST relocation and restructuring costs.
- Monitor liquidity and debt repayment needs, including the 2020 Senior Notes maturity, capital-lease obligations, and compliance with covenants.
- Follow the Gemtech appeal, product-liability matters, and any developments affecting potential losses; the filing did not provide a clear estimate of reasonably possible additional litigation losses.