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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2019

Commission File No. 001-31552

 

American Outdoor Brands Corporation

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

87-0543688

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2100 Roosevelt Avenue

Springfield, Massachusetts

 

01104

(Address of principal executive offices)

 

(Zip Code)

(800331-0852

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class

Trading Symbol

Name of exchange on which registered

Common Stock, par value $.001 per share

AOBC

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐  

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

  

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had 54,821,771 shares of common stock, par value $0.001, outstanding as of August 27, 2019.

 

 


AMERICAN OUTDOOR BRANDS CORPORATION

Quarterly Report on Form 10-Q

For the Three Months Ended July 31, 2019 and 2018

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

4

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

27

 

Item 4. Controls and Procedures

  

27

 

 

 

 

PART II - OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

28

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

Item 6. Exhibits

  

28

Signatures

  

30

EX-31.1

  

 

EX-31.2

  

 

EX-32.1

  

 

EX-32.2

  

 

 

Smith & Wesson®, S&W®, M&P®, M&P Shield®, Performance Center®, Bodyguard®, Governor®, SW22 Victory®, T/C ®, America’s Master Gunmaker ®, Compass®, Contender®, Dimension®, Encore®, Triumph®, Weather Shield®, Caldwell®, Delta Series®, Wheeler®, Tipton®, Frankford Arsenal®, Lockdown®, BOG-POD®, Golden Rod®, Mag Charger®, Hooyman®, Schrade®, Old Timer®, Uncle Henry®, Imperial®, Non-Typical Wildlife Solutions®, Crimson Trace®, Lasergrips®, Laserguard®, Rail Master®, Shockstop®, Laserlyte®, Key Gear®, U-Dig-It®, Bubba®, Bubba Blade®, One Cut and You’re Through®, Gemtech®, G-Core®, Halo®, Integra®, World Class Silencers®, LiNQ®, Stinky Bubba®, and Turkinator™ are some of the registered U.S. trademarks of our company or one of our subsidiaries. American Outdoor Brands CorporationSM, M2.0™, SDVE™, Thompson/Center Arms™, Impact!™, Strike™, Venture™, Defender Series™, Instinctive Activation™, Master Series™, UST™, Blast Jacket™, One™, The Professional’s Choice for Decades™, and World Class Ammunition™ are some of the unregistered trademarks of our company or one of our subsidiaries. This report also may contain trademarks and trade names of other companies.

 

 


Statement Regarding Forward-Looking Information

 

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding the impact, if any, of recently issued accounting standards on our consolidated financial statements; the expected performance of acquired businesses; our assessment of factors relating to the valuation of assets acquired and liabilities assumed in acquisitions, the timing for such evaluations, and the potential adjustment in such evaluations; assessments that we make about determining segments and reporting units; the features of our outstanding debt and our expectation that our interest rate swap will not have any material effect on our earnings or our consolidated financial statements within the next 12 months; estimated amortization expense of intangible assets for future periods; the potential for impairment charges; the outcome of the lawsuits to which we are subject and their effect on us; our belief that inventory levels, both internally and in the distribution channel, in excess of demand, may negatively impact future operating results; our belief that it is difficult to forecast the potential impact of distributor inventories on future revenue and income as demand is impacted by many factors, including seasonality, new product introductions, news events, political events,  and consumer tastes; the impact of the Tax Cuts and Jobs Act, or Tax Reform, on our operating results, including our belief that Tax Reform will be a benefit to us and reduce our effective tax rate; the effects of acquisitions on our overall financial performance; our assessment of our acquisitions, including the quality and strength of their products; our assessment of consumer demand and factors that stimulate demand for our products; the effect on our business of various factors, including terrorism and the level of political pressures on firearm laws and regulations; future investments for capital expenditures; future products and product developments; the features, quality, and performance of our products; the success of particular product or marketing programs; our market share and factors that affect our market share; and liquidity and anticipated cash needs and availability. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors could cause actual results to differ materially from those indicated by the forward-looking statements. Such factors include, among other, economic, social, political, legislative, and regulatory factors; the potential for increased regulation of firearms and firearms-related products; actions of social activists that could have an adverse effect on our business; the impact of lawsuits; the demand for our products; the state of the U.S. economy in general and the firearm industry in particular; general economic conditions and consumer spending patterns; our competitive environment; the supply, availability, and costs of raw materials and components; speculation surrounding fears of terrorism and crime; our anticipated growth and growth opportunities; our ability to increase demand for our products in various markets, including consumer, law enforcement, and military channels, domestically and internationally; our penetration rates in new and existing markets; our strategies; our ability to maintain and enhance brand recognition and reputation; risks associated with the establishment of our new 632,000 square foot national logistics facility including the expected benefits; our ability to introduce new products; the success of new products; our ability to expand our markets; our ability to integrate acquired businesses in a successful manner; the general growth of our outdoor products and accessories business; the potential for cancellation of orders from our backlog; and other factors detailed from time to time in our reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended April 30, 2019, filed with the SEC on June 19, 2019.

 

 

 


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

As of:

 

 

 

July 31, 2019

 

 

April 30, 2019

 

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,732

 

 

$

41,015

 

Accounts receivable, net of allowance for doubtful accounts of $2,294 on

   July 31, 2019 and $1,899 on April 30, 2019

 

 

70,242

 

 

 

84,907

 

Inventories

 

 

195,448

 

 

 

163,770

 

Prepaid expenses and other current assets

 

 

9,350

 

 

 

6,528

 

Income tax receivable

 

 

2,140

 

 

 

2,464

 

Total current assets

 

 

307,912

 

 

 

298,684

 

Property, plant, and equipment, net

 

 

174,355

 

 

 

183,268

 

Intangibles, net

 

 

87,113

 

 

 

91,840

 

Goodwill

 

 

182,267

 

 

 

182,269

 

Other assets

 

 

20,808

 

 

 

10,728

 

 

 

$

772,455

 

 

$

766,789

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

29,549

 

 

$

35,584

 

Accrued expenses and deferred revenue

 

 

35,750

 

 

 

39,322

 

Accrued payroll and incentives

 

 

10,598

 

 

 

21,473

 

Accrued income taxes

 

 

248

 

 

 

175

 

Accrued profit sharing

 

 

3,516

 

 

 

2,830

 

Accrued warranty

 

 

4,987

 

 

 

5,599

 

Current portion of notes and loans payable

 

 

79,800

 

 

 

6,300

 

Total current liabilities

 

 

164,448

 

 

 

111,283

 

Deferred income taxes

 

 

9,683

 

 

 

9,776

 

Notes and loans payable, net of current portion

 

 

99,467

 

 

 

149,434

 

Finance lease payable, net of current portion

 

 

40,708

 

 

 

45,400

 

Other non-current liabilities

 

 

15,091

 

 

 

6,452

 

Total liabilities

 

 

329,397

 

 

 

322,345

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $.001 par value, 20,000,000 shares authorized, no shares

   issued or outstanding

 

 

 

 

 

 

Common stock, $.001 par value, 100,000,000 shares authorized,

   72,987,388 issued and 54,820,526 shares outstanding on

   July 31, 2019 and 72,863,624 shares issued and 54,696,762 shares

   outstanding on April 30, 2019

 

 

73

 

 

 

73

 

Additional paid-in capital

 

 

264,230

 

 

 

263,180

 

Retained earnings

 

 

400,838

 

 

 

402,946

 

Accumulated other comprehensive income

 

 

292

 

 

 

620

 

Treasury stock, at cost (18,166,862 shares on July 31, 2019 and

   April 30, 2019)

 

 

(222,375

)

 

 

(222,375

)

Total stockholders’ equity

 

 

443,058

 

 

 

444,444

 

 

 

$

772,455

 

 

$

766,789

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS)/INCOME AND COMPREHENSIVE (LOSS)/INCOME

(Unaudited)

 

 

 

For the Three Months Ended July 31,

 

 

2019

 

 

2018

 

 

 

 

(In thousands, except per share data)

Net sales

 

$

123,665

 

 

$

138,833

 

 

Cost of sales

 

 

75,811

 

 

 

86,411

 

 

Gross profit

 

 

47,854

 

 

 

52,422

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,229

 

 

 

2,810

 

 

Selling, marketing, and distribution

 

 

16,773

 

 

 

11,615

 

 

General and administrative

 

 

26,709

 

 

 

24,521

 

 

Total operating expenses

 

 

46,711

 

 

 

38,946

 

 

Operating income

 

 

1,143

 

 

 

13,476

 

 

Other (expense)/income, net:

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

 

5

 

 

 

(18

)

 

Interest expense, net

 

 

(2,627

)

 

 

(2,001

)

 

Total other (expense)/income, net

 

 

(2,622

)

 

 

(2,019

)

 

(Loss)/income from operations before income taxes

 

 

(1,479

)

 

 

11,457

 

 

Income tax expense

 

 

629

 

 

 

3,812

 

 

Net (loss)/income

 

 

(2,108

)

 

 

7,645

 

 

Comprehensive (loss)/income:

 

 

 

 

 

 

 

 

 

Change in unrealized loss on interest rate

   swap

 

 

(420

)

 

 

(104

)

 

Other comprehensive loss, before income taxes

 

 

(420

)

 

 

(104

)

 

Income tax benefit on other comprehensive

   loss

 

 

92

 

 

 

27

 

 

Other comprehensive loss, net of tax

 

 

(328

)

 

 

(77

)

 

Comprehensive (loss)/income:

 

$

(2,436

)

 

$

7,568

 

 

Net (loss)/income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.04

)

 

$

0.14

 

 

Diluted

 

$

(0.04

)

 

$

0.14

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

54,783

 

 

 

54,345

 

 

Diluted

 

 

54,783

 

 

 

54,931

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Stockholders’

 

(In thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income/(Loss)

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance at April 30, 2018

 

 

72,434

 

 

$

72

 

 

$

253,616

 

 

$

389,146

 

 

$

1,689

 

 

 

18,167

 

 

$

(222,375

)

 

$

422,148

 

Proceeds from exercise of

   employee stock options

 

 

17

 

 

 

 

 

 

139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

139

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,990

 

Change in unrealized loss on

   interest rate swap, net of tax effect

 

 

 

 

 

 

 

 

 

 

 

(77

)

 

 

 

 

 

 

(77

)

Impact of adoption of accounting

   standard updates

 

 

 

 

 

 

 

 

(4,610

)

 

 

 

 

 

 

 

 

 

(4,610

)

Issuance of common stock under restricted

   stock unit awards, net of shares surrendered

 

 

100

 

 

 

1

 

 

 

(556

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(555

)

Net income

 

 

 

 

 

 

 

 

 

 

7,645

 

 

 

 

 

 

 

 

 

 

 

 

7,645

 

Balance at July 31, 2018

 

 

72,551

 

 

 

73

 

 

 

255,189

 

 

 

392,181

 

 

 

1,612

 

 

 

18,167

 

 

 

(222,375

)

 

 

426,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2019

 

 

72,864

 

 

 

73

 

 

 

263,180

 

 

 

402,946

 

 

 

620

 

 

 

18,167

 

 

 

(222,375

)

 

 

444,444

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,588

 

Change in unrealized loss on

   interest rate swap, net of tax effect

 

 

 

 

 

 

 

 

 

 

 

(328

)

 

 

 

 

 

 

(328

)

Issuance of common stock under restricted

   stock unit awards, net of shares surrendered

 

 

124

 

 

 

 

 

 

(538

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(538

)

Net loss

 

 

 

 

 

 

 

 

 

 

(2,108

)

 

 

 

 

 

 

 

 

 

 

 

(2,108

)

Balance at July 31, 2019

 

 

72,988

 

 

$

73

 

 

$

264,230

 

 

$

400,838

 

 

$

292

 

 

 

18,167

 

 

$

(222,375

)

 

$

443,058

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months Ended July 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss)/income

 

$

(2,108

)

 

$

7,645

 

Adjustments to reconcile net income to net cash (used in)/provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14,346

 

 

 

12,852

 

Loss on sale/disposition of assets

 

 

 

 

 

7

 

Provision for losses on notes and accounts receivable

 

 

634

 

 

 

55

 

Deferred income taxes

 

 

 

 

 

(1,520

)

Stock-based compensation expense

 

 

1,588

 

 

 

1,990

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

14,031

 

 

 

15,208

 

Inventories

 

 

(31,678

)

 

 

(13,538

)

Prepaid expenses and other current assets

 

 

(2,822

)

 

 

(2,363

)

Income taxes

 

 

397

 

 

 

3,892

 

Accounts payable

 

 

(6,015

)

 

 

(3,921

)

Accrued payroll and incentives

 

 

(10,875

)

 

 

(653

)

Accrued profit sharing

 

 

686

 

 

 

254

 

Accrued expenses and deferred revenue

 

 

(6,675

)

 

 

(8,568

)

Accrued warranty

 

 

(612

)

 

 

(656

)

Other assets

 

 

428

 

 

 

(62

)

Other non-current liabilities

 

 

(463

)

 

 

17

 

Net cash (used in)/provided by operating activities

 

 

(29,138

)

 

 

10,639

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Payments to acquire patents and software

 

 

(123

)

 

 

(190

)

Proceeds from sale of property and equipment

 

 

 

 

 

1

 

Payments to acquire property and equipment

 

 

(3,695

)

 

 

(6,919

)

Net cash used in investing activities

 

 

(3,818

)

 

 

(7,108

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from loans and notes payable

 

 

25,000

 

 

 

 

Payments on finance lease obligation

 

 

(214

)

 

 

(161

)

Payments on notes and loans payable

 

 

(1,575

)

 

 

(26,575

)

Proceeds from exercise of options to acquire common stock

 

 

 

 

 

139

 

Payment of employee withholding tax related to restricted

   stock units

 

 

(538

)

 

 

(556

)

Net cash provided by/(used in) financing activities

 

 

22,673

 

 

 

(27,153

)

Net decrease in cash and cash equivalents

 

 

(10,283

)

 

 

(23,622

)

Cash and cash equivalents, beginning of period

 

 

41,015

 

 

 

48,860

 

Cash and cash equivalents, end of period

 

$

30,732

 

 

$

25,238

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

1,690

 

 

$

1,220

 

Income taxes

 

$

235

 

 

$

484

 

 

7


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(Unaudited)

 

Supplemental Disclosure of Non-cash Investing and Financing Activities:

 

 

 

For the Three Months Ended July 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

 

$

547

 

 

$

4,332

 

Purchases of property and equipment funded by capital lease

 

 

 

 

12,074

 

Capital lease obligation

 

 

 

 

12,074

 

Changes in other assets for operating lease obligations

 

 

10,928

 

 

 

Change in property and equipment for adoption of ASU 2016-02

 

 

3,201

 

 

 

Changes in finance lease liabilities for the adoption of ASU 2016-02

 

 

(4,245

)

 

 

Changes in lease liabilities for operating lease obligations

 

 

11,970

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

8


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2019 and 2018

 

(1) Organization:

We are a leading manufacturer, designer, and provider of consumer products for the shooting, hunting, and rugged outdoor enthusiast. We are one of the largest manufacturers of handguns, modern sporting rifles, and handcuffs in the United States and an active participant in the hunting rifle and suppressor markets. We are also a leading provider of shooting, hunting, and rugged outdoor products and accessories, including knives and cutting tools, sighting lasers, shooting supplies, tree saws, and survival gear.

In our Firearms segment, we manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and muzzleloaders), handcuffs, suppressors, and other firearm-related products for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We sell our firearm products under the Smith & Wesson, M&P, Performance Center, Thompson/Center Arms, and Gemtech brands. We manufacture our firearm products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We also sell our manufacturing services to other businesses to level-load our factories. We sell those services under our Smith & Wesson and Smith & Wesson Precision Components brands.

In our Outdoor Products & Accessories segment, we design, source, distribute, and manufacture reloading, gunsmithing, and gun cleaning supplies; high-quality stainless steel cutting tools and accessories; flashlights; tree saws and related trimming accessories; shooting supplies, rests, and other related accessories; fishing accessories; apparel; vault accessories; laser grips and laser sights; and a full range of products for survival and emergency preparedness. We sell our products under the Caldwell, Crimson Trace, Wheeler, Tipton, Frankford Arsenal, Schrade, Imperial, Uncle Henry, BUBBA, UST, Lockdown, Hooyman, BOG, Old Timer, LaserLyte, and KeyGear brands. We also offer firearms and non-firearms accessories, such as flashlights and knives, under our brands in our firearms business, including Smith & Wesson, M&P, Performance Center, and Thompson/Center Arms. We develop and market our outdoor products and accessories at our facilities in Columbia, Missouri and Wilsonville, Oregon.

(2) Basis of Presentation:

Interim Financial Information – The condensed consolidated balance sheet as of July 31, 2019, the condensed consolidated statements of (loss)/income and comprehensive (loss)/income for the three months ended July 31, 2019 and 2018, the condensed consolidated statement of changes in stockholders’ equity for the three months ended July 31, 2019, and the condensed consolidated statements of cash flows for the three months ended July 31, 2019 and 2018 have been prepared by us without audit. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows at July 31, 2019 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2019 has been derived from our audited consolidated financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019. The results of operations for the three months ended July 31, 2019 may not be indicative of the results that may be expected for the year ending April 30, 2020, or any other period.

Revenue Recognition - We recognize revenue in accordance with the provisions of Accounting Standards Update, or ASU, Revenue from Contracts with Customers (Topic 606), which became effective for us on May 1, 2018. Generally, all performance obligations are satisfied and revenue is recognized when the risks and rewards of ownership have transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance.

In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs that entitle customers to receive free goods based upon their purchase of our products. The fulfillment of these free goods are our responsibility. In such instances, we allocate the revenue of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the products included in the promotional program, including the free goods. We recognize revenue proportionally as each performance obligation is satisfied, based on the relative transaction price of each product. The net change in contract liabilities for a given period is reported as an increase or decrease to sales.

9


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2019 and 2018

 

Our product sales are generally sold free on board, or FOB, shipping point and provide payment terms to most commercial customers ranging from 20 to 90 days of product shipment with a discount available to some customers for early payment. For contracts with discounted terms, we determine the transaction price upon establishment of the contract that contains the final terms of the sale, including the description, quantity, and price of each product purchased. We estimate variable consideration relative to the amount of cash discounts to which customers are likely to be entitled. In some instances, we provide longer payment terms, particularly as it relates to our hunting dating programs, which represent payment terms due in the fall for certain orders of hunting products received in the spring and summer. We do not consider these extended terms to be a significant financing component of the contract because the payment terms are less than one year. In all cases, we consider our costs related to shipping and handling to be a cost of fulfilling the contract with the customer.

Recently Issued Accounting Standards – In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), or ASU 2016-02, which amends the existing guidance to require lessees to recognize right-of-use assets and lease liabilities in a classified balance sheet. The most prominent among the changes in the standard is the requirement for lessees to recognize right-of-use assets and lease liabilities for those leases classified as operating leases under current U.S. GAAP. The requirements of this ASU are effective for financial statements for annual periods beginning after December 15, 2018, and early adoption is permitted. We utilized leasing software to assist us in the accounting and tracking of leases and used the optional transitional method allowed by ASU 2018-11, Leases (Topic 842 Targeted Improvements. Under this method, we applied the standard using the modified retrospective method with an adoption date of May 1, 2019. We elected to use the package of practical expedients, which permits us to not reassess certain lease contract provisions. We adopted ASU 2016-02 effective May 1, 2019 and recognized right-of-use assets of $11.5 million, lease liabilities of $12.8 million. The difference between the right-of-use assets and the lease liabilities of $1.3 million is a result of the reclassification of deferred rent and lease incentive liabilities primarily relating to our real estate operating leases into the right-of use assets, which had no impact to retained earnings. See also Note 3 – Leases, for more information.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The requirements of this ASU are effective for financial statements for annual periods beginning after December 15, 2019, and early adoption is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements, which we do not expect to be material.

(3) Leases:

We lease certain of our real estate, machinery, photocopiers, and vehicles under non-cancelable operating lease agreements. On May 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842), which requires the recognition of the right-of-use assets and related operating and finance lease liabilities in our condensed consolidated balance sheet. The most prominent among the changes in the standard is the requirement for lessees to recognize right-of-use assets and lease liabilities for those leases classified as operating leases under current U.S. GAAP. We adopted Topic 842 using a modified retrospective approach for all leases existing at May 1, 2019. 

Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our lease agreements do not require material variable lease payments, residual value guarantees, or restrictive covenants. For operating leases, expense is recognized on a straight-line basis over the lease term. Tenant improvement allowances are recorded as an offsetting adjustment included in our calculation of its right-of-use asset.

Many of our leases include renewal options that can extend the lease term. The execution of those renewal options is at our sole discretion and reflected in the lease term when they are reasonably certain to be exercised. The depreciable life of assets and leasehold improvements are limited by the expected lease term.

10


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2019 and 2018

 

The amounts of assets and liabilities related to our operating and financing leases as of July 31, 2019 are as follows (in thousands):

 

 

 

Balance Sheet Caption

 

July 31, 2019

 

Operating Leases

 

 

 

 

 

 

Right-of-use assets

 

 

 

$

10,928

 

Accumulated amortization

 

 

 

 

(643

)

Right-of-use assets, net

 

Other assets

 

$

10,285

 

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

$

2,726

 

Non-current liabilities

 

Other non-current liabilities

 

 

8,778

 

Total operating lease liabilities

 

 

 

$

11,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases

 

 

 

 

 

 

Right-of-use assets

 

 

 

$

41,070

 

Accumulated depreciation

 

 

 

 

(551

)

Right-of-use assets, net

 

Property, plant, and equipment, net

 

$

40,519

 

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

 

914

 

Non-current liabilities

 

Finance lease payable, net of current portion

 

 

40,708

 

Total finance lease liabilities

 

 

 

$

41,622

 

 

We recorded $1.0 million of operating lease costs, of which $200,000 were short-term operating lease costs, $535,000 of financing lease amortization, and $520,000 of financing lease interest expense during the three months ended July 31, 2019. As of July 31, 2019, our weighted average lease term and weighted average discount rate for our operating leases was 4.8 years and 4.6%, respectively. As of July 31, 2019, our weighted average lease term and weighted average discount rate for our financing leases was 19.0 years and 5.0%, respectively, and consists primarily of our national logistics facility located in Columbia, Missouri. The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight-line basis over the life of the lease.

Future lease payments for all our operating and finance leases for succeeding fiscal years is as follows (in thousands):

 

 

 

 

 

Operating

 

 

Financing

 

 

Total

 

2020

 

 

 

$

2,503

 

 

$

2,230

 

 

$

4,733

 

2021

 

 

 

 

2,874

 

 

 

3,016

 

 

 

5,890

 

2022

 

 

 

 

2,712

 

 

 

3,056

 

 

 

5,768

 

2023

 

 

 

 

2,582

 

 

 

3,071

 

 

 

5,653

 

2024

 

 

 

 

1,537

 

 

 

3,125

 

 

 

4,662

 

2025

 

 

 

 

268

 

 

 

3,180

 

 

 

3,438

 

Thereafter

 

 

 

 

680

 

 

 

48,853

 

 

 

49,543

 

Total future lease payments

 

 

 

 

13,156

 

 

 

66,531

 

 

 

79,687

 

Less amounts representing interest

 

 

 

 

(1,652

)

 

 

(24,909

)

 

 

(26,561

)

Present value of lease payments

 

 

 

 

11,504

 

 

 

41,622

 

 

 

53,126

 

Less current maturities of lease liabilities

 

 

 

 

(2,726

)

 

 

(914

)

 

 

(3,640

)

Long-term maturities of lease liabilities

 

 

 

$

8,778

 

 

$

40,708

 

 

$

49,486

 

 

During the three months ended July 31, 2019, the cash paid for amounts included in the measurement of the liabilities and the operating cash flows was $1.4 million.

(4) Revenue Recognition and Contracts with Customers:

On May 1, 2018, we adopted ASU 2014-09 Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, using the modified retrospective approach, and recorded a contract liability, included in accrued expenses in the condensed consolidated balance

11


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2019 and 2018

 

sheet, for outstanding performance obligations related to sales promotions. When evaluating our performance obligations, we disaggregate revenue based on major product lines, which correlate with our reportable segments disclosed in Note 11Segment Reporting. Also, domestic sales account for 95% of our total net sales. There are no significant judgments or estimates used in the determination of performance obligations, and the transaction price for the performance obligations are allocated on a pro-rata basis. There are no other contract costs that need to be considered based on the nature of our performance obligations.

The following table outlines the impact of the adoption of ASU 2014-09 on revenue recognized during the three-month periods ended July 31, 2019 and 2018 (in thousands):

 

 

 

July 31, 2019

 

 

July 31, 2018