American Outdoor Brands Corporation (Smith & Wesson Brands) — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended July 31, 2017. Financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context and results
The company manufactures firearms and sells shooting, hunting, outdoor, and survival products through its Firearms and Outdoor Products & Accessories segments. Results reflect three acquisitions completed in fiscal 2017: Taylor Brands, Crimson Trace, and Ultimate Survival Technologies (UST).
| Metric | Quarter ended July 31, 2017 | Prior-year quarter |
|---|---|---|
| Net sales | $129.0 million | $207.0 million |
| Gross profit / gross margin | $40.6 million / 31.5% | $87.6 million / 42.3% |
| Operating income (loss) / margin | $(3.2) million / (2.5)% | $52.5 million / 25.4% |
| Net income (loss) | $(2.2) million | $35.2 million |
| Diluted EPS | $(0.04) | $0.62 |
| Operating cash flow | $(34.5) million | $40.6 million |
Financial position, liquidity, and debt
- Cash and cash equivalents were $43.4 million at July 31, down from $61.5 million at April 30, 2017. Current assets were $317.7 million and current liabilities $195.1 million, implying working capital of approximately $122.7 million.
- Inventory was $161.1 million, up $29.4 million from April 30; the increase was primarily in firearms finished goods.
- Debt included $75.0 million drawn on the revolving credit line, $92.4 million outstanding on the term loan, and $75.0 million of 5.000% senior notes due July 2018. Balance-sheet notes and loans payable totaled approximately $240.6 million, net of applicable issuance costs.
- The revolver had $350 million of availability and matures October 27, 2021. The term loan carried a 3.06% effective rate; the company reported compliance with all debt covenants. Cash provided by financing activities was $21.1 million, primarily reflecting $25.0 million of additional revolver borrowings.
Material changes and management explanation
- Net sales fell 37.7%. Firearms external sales declined 48.9% to $98.4 million, including handgun sales down 46.6% and long-gun sales down 64.4%. Outdoor Products & Accessories external sales rose 110.7% to $30.7 million, primarily due to acquisitions; management reported organic segment revenue growth of 11.4%.
- Management attributed weaker firearms shipments to softened customer orders and excess retail-channel inventories. It also cited unusually strong prior-year demand amid news and election-related concerns, and promotions in the preceding quarter that may have pulled shipments forward. Adjusted NICS checks were down 11.2% year over year, although management noted they were 5.8% above the comparable quarter in fiscal 2016.
- Firearms gross margin fell to 27.4% from 41.9%, with management citing lower volume, promotional discounts, unfavorable fixed-cost absorption, and inventory valuation adjustments. Company gross margin also reflected a larger contribution from the lower-margin firearms business mix.
- Operating expenses rose 25.1% to $43.8 million, including approximately $10.0 million of additional expenses related to the 2017 acquisitions. The company recorded $5.7 million of acquired-intangible amortization, compared with $2.5 million in the prior-year quarter.
- Operating cash flow was negative, driven mainly by inventory growth, payment timing for accounts payable, and incentive payments. Receivable collections partly offset these uses. Investing cash outflow was $4.8 million, including $4.7 million of property and equipment purchases.
Outlook, risks, and unusual items
- Management expected inventory to continue growing over the next few quarters in preparation for seasonal demand, product launches, and industry ordering shows. It forecast approximately $30 million in fiscal 2018 capital expenditures.
- Management believed existing capital resources and credit facilities would fund operations, debt service, and other commitments for the next 12 months, while cautioning that future financing may not be available on acceptable terms.
- A $1.3 million reduction in the UST contingent-consideration liability was recorded as other income because the company did not expect UST to meet performance metrics; the remaining liability was $0.4 million.
- After quarter-end, the company acquired Gemtech and Bubba Blade-branded products for an aggregate $22.0 million, subject to adjustments; up to an additional $17.1 million could be payable to Gemtech based on future performance.
- The company disclosed three product-liability cases and seven other product-liability claims, along with other ordinary-course proceedings. It said it could not estimate a range of reasonably possible additional losses and was vigorously defending the matters.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It did not expect the forthcoming revenue-recognition standard to have a material impact; lease-standard effects were still under evaluation.
Most important facts for investors to verify
- Whether firearms orders and channel inventories normalize, and whether elevated company inventory can be sold without further discounting or margin pressure.
- Whether the Outdoor Products & Accessories segment sustains organic growth and improves margins after acquisition-related costs and amortization.
- Cash conversion and working-capital trends, particularly inventory, alongside borrowings and the July 2018 senior-note maturity.
- Actual fiscal 2018 capital expenditures versus the approximately $30 million expectation, and the funding and integration effects of the post-quarter acquisitions.
- Developments in product-liability and other litigation; the filing states that additional reasonably possible losses could not be estimated.