Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of American Outdoor Brands Corporation and subsidiaries (the "Company") as of April 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended April 30, 2018, and the related notes and the financial statement schedule listed in the Table of Contents at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of April 30, 2018, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2018, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by COSO.
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting
. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statement
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 fiscal 2017, we changed the name of our company from Smith & Wesson Holding Corporation to American Outdoor Brands Corporation to better reflect our expanding strategic focus on the growing markets for shooting, hunting, and rugged outdoor enthusiasts. We believe that the name ”American Outdoor Brands Corporation” better reflects our family of brands, our broad range of product offerings, and our plan to continue building upon our portfolio of strong American brands. We have two reporting segments: (1) Firearms (which includes the Firearms and Manufacturing Services divisions) and (2) Outdoor Products & Accessories (which includes the Outdoor Products & Accessories and Electro-Optics divisions).
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, Gemtech, and Thompson/Center Arms brands. We manufacture our firearm products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We perform research and development activities for our suppressors and accessories products at our facility in Meridian, Idaho. We also sell our manufacturing services to other businesses under our Smith & Wesson and Smith & Wesson Precision Components, formerly known as Deep River Plastics, 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; 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, Wheeler, Tipton, Frankford Arsenal, Smith & Wesson, M&P, Thompson/Center, Lockdown, Hooyman, BOG-POD, Golden Rod, Non-Typical, Crimson Trace, Imperial, Schrade, Old Timer, Bubba Blade, UST, and KeyGear brands. We develop and market our outdoor products and accessories at our facilities in Columbia, Missouri; Wilsonville, Oregon; and Jacksonville, Florida.
During fiscal 2017, we acquired substantially all of the net assets of Taylor Brands, LLC as well as Ultimate Survival Technologies, Inc., and we acquired all of the issued and outstanding stock of Crimson Trace Corporation, in three separate transactions, which we refer to collectively as the 2017 Acquisitions. See Note 2 –
Acquisitions
below for more information regarding these transactions.
During fiscal 2018, we acquired substantially all of the net assets of Gemini Technologies, Incorporated, or Gemtech, as well as Bubba Blade branded products and other assets from Fish Tales, LLC, in two separate transactions, which we refer to collectively as the 2018 Acquisitions. See Note 2 –
Acquisitions
below for more information regarding these transactions.
The 2017 Acquisitions and 2018 Acquisitions have been accounted for in accordance with ASC 805-20,
Business Combinations,
and accordingly, the results of operations from the acquired businesses have been included in our consolidated financial statements following the acquisition dates.
F-8
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
2. Acquisitions
2018 Acquisitions
In August 2017, in two separate transactions, we acquired (1) substantially all of the net assets of Gemtech and (2) Bubba Blade branded products and other assets from Fish Tales, LLC. The aggregate purchase price for the two acquisitions was $23.1 million, subject to certain adjustments, utilizing a combination of cash on hand and borrowings under our revolving line of credit. In connection with the Gemtech acquisition, additional consideration of up to a maximum of $17.1 million may be paid contingent upon the cumulative three year sales volume of Gemtech products. The valuation of this contingent consideration liability was established in accordance with ASC 805 —
Business Combinations
. Based on current forecasted revenue, we believe it is unlikely that the acquired business will achieve the performance metrics. Therefore, as of April 30, 2018, the contingent liability was recorded at a fair value of $100,000 in non-current liabilities. Gemtech, based in Meridian, Idaho, is a provider of quality suppressors and accessories for the consumer, law enforcement, and military markets. Fish Tales, LLC, based in Oro Valley, Arizona, was a provider of premium sportsmen knives and tools for fishing and hunting, including the premium knife brand Bubba Blade. The Gemtech business will be fully integrated into our Firearms segment, and the Fish Tales, LLC assets and business will be fully integrated into our Outdoor Products & Accessories segment. Therefore, we will not provide discrete financial information for the 2018 Acquisitions in future periods.
We are in the process of finalizing the valuations of the assets acquired and liabilities assumed in the 2018 Acquisitions. Therefore, the fair values for these acquisitions are subject to further adjustments as we obtain additional information during the respective measurement periods, which will not exceed 12 months from the date of each acquisition. The 2018 Acquisitions will necessitate the use of this measurement period to adequately analyze and assess a number of factors used in establishing the asset and liability fair values as of each acquisition date, including significant contractual and operational factors underlying the trade name, developed technology, and customer relationship intangible assets.
The following table summarizes the estimated preliminary allocation of the purchase price for the 2018 Acquisitions (in thousands):
|
|
2018 Acquisitions
|
|
|
|
Measurement
|
|
|
|
|
|
|
|
|
(As Initially
|
|
|
|
Period
|
|
|
|
2018 Acquisitions
|
|
|
|
Reported)
|
|
|
|
Adjustments
|
|
|
|
(As Adjusted)
|
|
Accounts receivable
|
|
$
|
846
|
|
|
|
|
(176
|
)
|
|
|
$
|
670
|
|
Inventories
|
|
|
4,683
|
|
|
|
|
17
|
|
|
|
|
4,700
|
|
Other current assets
|
|
|
145
|
|
|
|
|
(51
|
)
|
|
|
|
94
|
|
Property, plant, and equipment
|
|
|
506
|
|
|
|
|
13
|
|
|
|
|
519
|
|
Intangibles
|
|
|
6,400
|
|
|
|
|
—
|
|
|
|
|
6,400
|
|
Goodwill
|
|
|
11,846
|
|
|
|
|
175
|
|
|
|
|
12,021
|
|
Total assets acquired
|
|
|
24,426
|
|
|
|
|
(22
|
)
|
|
|
|
24,404
|
|
Accounts payable
|
|
|
1,261
|
|
|
|
|
(25
|
)
|
|
|
|
1,236
|
|
Accrued payroll
|
|
|
49
|
|
|
|
|
(1
|
)
|
|
|
48
|
|
Other long term liabilities
|
|
|
100
|
|
|
|
|
(100
|
)
|
|
|
|
—
|
|
Total liabilities assumed
|
|
|
1,410
|
|
|
|
|
(126
|
)
|
|
|
|
1,284
|
|
|
|
$
|
23,016
|
|
|
|
|
104
|
|
|
|
$
|
23,120
|
|
Included in general and administrative costs were $769,000 of acquisition-related costs incurred during the year ended April 30, 2018, related to the 2018 Acquisitions.
F-9
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
We amortize intangible assets in proportion to expected annual revenue generated from the intangibles that we acquire. The following are the id
entifiable intangible assets acquired (in thousands) in the 2018 Acquisitions and their respective weighted average lives:
|
|
|
|
|
Weighted
Average
|
|
|
|
Amount
|
|
|
|
Life (In years)
|
|
Developed technology
|
|
$
|
1,700
|
|
|
|
|
5.9
|
|
Customer relationships
|
|
|
1,600
|
|
|
|
|
5.2
|
|
Trade names
|
|
|
3,100
|
|
|
|
|
5.6
|
|
|
|
$
|
6,400
|
|
|
|
|
|
|
Pro forma results of operations assuming that the 2018 Acquisitions had occurred as of May 1, 2016 are not required because of the immaterial impact on our consolidated financial statements for all periods presented.
2017 Acquisitions
In fiscal 2017, in three separate transactions, we acquired (1) substantially all of the net assets of Taylor Brands, LLC, (2) substantially all of the assets of Ultimate Survival Technologies Inc. (now referred to as Ultimate Survival Technologies, LLC, or UST), and (3) all of the issued and outstanding stock of Crimson Trace Corporation for an aggregate purchase price of $211.1 million, net of cash acquired, subject to certain adjustments, utilizing cash on hand. In connection with the purchase of Ultimate Survival Technologies, Inc., up to an additional $2.0 million may be paid over a period of two years, contingent upon the financial performance of the acquired business. The valuation of this contingent liability was established in accordance with ASC 805 —
Business Combinations.
The initial fair value of this contingent consideration liability was $1.7 million. Based on the current forecasted revenue, during the year ended April 30, 2018, we recorded a $1.6 million reduction in the fair value of this contingent consideration liability because we do not expect that the acquired business will achieve the performance metrics. This reduction was recorded in other income on the consolidated statements of income. As of April 30, 2018, the fair value of this contingent liability was $60,000, which was recorded as a current liability.
We have completed the valuations of the assets acquired and liabilities assumed related to the 2017 Acquisitions. During the year ended April 30, 2018, we decreased goodwill by $10.1 million, primarily as a result of changes to the valuation of customer relationship intangible assets and the impact to the value of the related deferred tax liabilities relating to the 2017 Acquisitions. As a result, we reduced amortization expense by $476,000, net of tax, during fiscal 2018 relating to these changes for prior fiscal year amortization expense.
F-10
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The following table summarizes the estimated preliminary allocation of the purchase price for the 2017 Acquisitions (in thousands):
|
|
2017 Acquisitions
|
|
|
Measurement
|
|
|
|
|
|
|
|
(As Initially
|
|
|
Period
|
|
|
2017 Acquisitions
|
|
|
|
Reported)
|
|
|
Adjustments
|
|
|
(As Adjusted)
|
|
Accounts receivable
|
|
$
|
11,635
|
|
|
$
|
(213
|
)
|
|
$
|
11,422
|
|
Inventories
|
|
|
31,269
|
|
|
|
453
|
|
|
|
31,722
|
|
Income tax receivable
|
|
|
—
|
|
|
|
68
|
|
|
|
68
|
|
Other current assets
|
|
|
430
|
|
|
|
(132
|
)
|
|
|
298
|
|
Property, plant, and equipment
|
|
|
8,232
|
|
|
|
—
|
|
|
|
8,232
|
|
Intangibles
|
|
|
97,850
|
|
|
|
(14,500
|
)
|
|
|
83,350
|
|
Goodwill
|
|
|
92,801
|
|
|
|
10,109
|
|
|
|
102,910
|
|
Total assets acquired
|
|
|
242,217
|
|
|
|
(4,215
|
)
|
|
|
238,002
|
|
Accounts payable
|
|
|
6,214
|
|
|
|
18
|
|
|
|
6,232
|
|
Accrued expenses
|
|
|
973
|
|
|
|
158
|
|
|
|
1,131
|
|
Accrued payroll
|
|
|
1,500
|
|
|
|
(72
|
)
|
|
|
1,428
|
|
Accrued income taxes
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
—
|
|
Accrued warranty
|
|
|
98
|
|
|
|
96
|
|
|
|
194
|
|
Deferred income taxes
|
|
|
20,658
|
|
|
|
(4,409
|
)
|
|
|
16,249
|
|
Total liabilities assumed
|
|
|
29,449
|
|
|
|
(4,215
|
)
|
|
|
25,234
|
|
|
|
$
|
212,768
|
|
|
$
|
—
|
|
|
$
|
212,768
|
|
Included in general and administrative costs are $3.8 million of acquisition-related costs incurred for the 2017 Acquisitions during the year ended April 30, 2017. The 2017 Acquisitions generated $61.1 million of revenue during the year ended April 30, 2017.
We amortize intangible assets in proportion to expected yearly revenue generated from the intangibles that we acquire. We amortize order backlog over the estimated life during which the backlog is fulfilled. The following are the identifiable intangible assets acquired (in thousands) in the 2017 Acquisitions and their respective weighted average lives:
|
|
|
|
Weighted Average
|
|
|
|
Amount
|
|
|
Life (In years)
|
|
Developed technology
|
|
$
|
3,000
|
|
|
|
4.1
|
|
Customer relationships
|
|
|
62,100
|
|
|
|
5.0
|
|
Trade names
|
|
|
17,000
|
|
|
|
4.8
|
|
Order backlog
|
|
|
1,150
|
|
|
|
0.3
|
|
Non-competition agreement
|
|
|
100
|
|
|
|
3.4
|
|
|
|
$
|
83,350
|
|
|
|
|
|
Additionally, the following table reflects the unaudited pro forma results of operations assuming that the 2017 Acquisitions had occurred on May 1, 2015 (in thousands, except per share data):
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
April 30, 2017
|
|
|
April 30, 2016
|
|
Net sales
|
|
$
|
934,247
|
|
|
$
|
816,699
|
|
Income from operations
|
|
|
195,295
|
|
|
|
151,258
|
|
Net income per share - diluted
|
|
|
2.30
|
|
|
|
1.80
|
|
F-11
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The unaudited pro forma income from operations for the years ended April 30, 2017 and 2016 has been adjusted to reflect
increased cost of goods sold from the fair value step-up in inventory, which is expensed over the first inventory cycle, and the
amortization of intangibles and order backlog incurred as if the 2017 Acquisitions had occurred on May 1, 2015. The unaudited p
ro forma information is presented for informational purposes only and is not necessarily indicative of the actual results that would have been achieved had the 2017 Acquisitions occurred as of May 1, 2015 or the results that may be achieved in future perio
ds.
3. Significant Accounting Policies
Use of Estimates
— The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the financial statement dates and the reported amounts of revenue and expenses during the reporting periods. Our significant estimates include the accrual for warranty, reserves for excess and obsolete inventory, rebates and other promotions, and valuation of intangible assets. Actual results could differ from those estimates.
Principles of Consolidation
— The accompanying consolidated financial statements include the accounts of American Outdoor Brands Corporation and its wholly owned subsidiaries, including Smith & Wesson Corp. and SWPC Plastics, LLC, reported in our Firearms segment; BTI, BTI Tools, Crimson Trace, and UST, reported in our Outdoor Products & Accessories segment; and SWSS LLC, formerly Smith & Wesson Security Solutions, Inc., or SWSS, our former security solutions division. 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 April 30, 2018 and 2017 and for the periods presented, have been included. All intercompany accounts and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments
— Unless otherwise indicated, the fair values of all reported assets and liabilities, which represent financial instruments not held for trading purposes, approximate the carrying values of such amounts because of their short-term nature or market rates of interest.
Cash and Cash Equivalents
— We consider all highly liquid investments purchased with original maturities of three months or less at the date of acquisition to be cash equivalents. We maintain our cash in bank deposit accounts that, at times, may exceed federally insured limits. We have not experienced any losses in such accounts. As of April 30, 2018, all of our accounts exceeded federally insured limits.
Financial Instruments
— We account for derivative instruments under Accounting Standards Codification (“ASC”) 815-10,
Fair Value Measurements and Disclosure Topic
, which establishes accounting and reporting standards for derivative instruments and hedging activities and requires us to recognize these instruments as either assets or liabilities on the balance sheet and measure them at fair value. The carrying value of our Term Loan approximated the fair value as of April 30, 2018. The carrying value of the 2020 Senior Notes as of April 30, 2018 approximated the fair value in considering Level 2 inputs within the hierarchy as the 2020 Senior Notes are not frequently traded. The fair value of the interest rate swap was estimated by a third party using inputs that are observable or that can be corroborated by observable market data, such as interest rate yield curves, and, therefore, are classified within Level 2 of the valuation hierarchy. See Note 5 –
Notes and Loans Payable and Financing Arrangements
for more information regarding our financial instruments.
Trade Receivables
— We extend credit to our domestic customers and some foreign distributors based on their financial condition. We sometimes offer discounts for early payment on invoices. When we believe the extension of credit is not advisable, we rely on either a prepayment or a letter of credit. We write off balances deemed uncollectible by us against our allowance for doubtful accounts. We estimate our allowance for doubtful accounts through current past due balances, knowledge of our customers’ financial situations, and past payment history.
Concentrations of Credit Risk
— Financial instruments that potentially subject us to concentration of credit risk consist principally of cash, cash equivalents, and trade receivables. We place our cash and cash equivalents in overnight U.S. government securities. Concentrations of credit risk with respect to trade receivables are limited by the large number of customers comprising our customer base and their geographic and business dispersion. We perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral.
F-12
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
For our fiscal year ended April 30, 2018, one of our customers accounted for 11.9% of net sales and none of our customers accounted for 10.0% or more of our accounts receivable
. For the fiscal years ended April 30, 2017, none of our customers exceeded 10% of net sales; however, one of our customers accounted for approximately 17.5% of our accounts receivable.
For the fiscal year ended April 30, 2016, we did not have any customer
s that exceeded either 10% of net sales or accounts receivable.
Inventories
— We value inventories at the lower cost, using the first-in, first-out, or FIFO method, or net realizable value. An allowance for potential non-saleable inventory due to excess stock or obsolescence is based upon a detailed review of inventory, past history, and expected future usage.
Property, Plant, and Equipment
— We record property, plant, and equipment, consisting of land, building, improvements, machinery, equipment, software, hardware, furniture, and fixtures, at cost and depreciate them using the straight-line method over their estimated useful lives. We charge expenditures for maintenance and repairs to earnings as incurred, and we capitalize additions, renewals, and betterments. Upon the retirement or other disposition of property and equipment, we remove the related cost and accumulated depreciation from the respective accounts and include any gain or loss in operations. A summary of the estimated useful lives is as follows:
Description
|
|
Useful Life
|
|
Building and improvements
|
|
|
10 to 40 years
|
|
Software and hardware
|
|
|
2 to 7 years
|
|
Machinery and equipment
|
|
|
2 to 10 years
|
|
We include tooling, dies, and fixtures as part of machinery and equipment and depreciate them over a period generally not exceeding ten years.
Intangible Assets
— We record intangible assets at cost or based on the fair value of the assets acquired. Intangible assets consist of developed technology, customer relationships, trademarks, trade names, and patents.
We amortize intangible assets over their estimated useful lives or in proportion to expected yearly revenue generated from the intangibles that were acquired.
Revenue Recognition
— We recognize revenue when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. Federal excise taxes assessed on firearms are excluded from net sales.
Product sales account for most of our revenue. We recognize revenue from product sales when the earnings process is complete and 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. We also provide tooling, forging, heat treating, finishing, plating, and engineering support services to customers. We recognize this revenue when accepted by the customer, if applicable, when no further contingencies or material performance obligations exist, and when collectability is reasonably assured, thereby earning us the right to receive and retain payments for services performed and billed.
Segment Information
—
We have two reporting segments: Firearms, which includes our Firearms and Manufacturing Services divisions; and Outdoor Products & Accessories, which includes our Outdoor Products & Accessories and Electro-Optics divisions that are separate operating segments but have been aggregated into one reporting segment. See Note 19 –
Segment Reporting
for more information regarding our segments.
Research and Development
— We engage in both internal and external research and development, or R&D, in order to remain competitive and to exploit possible untapped market opportunities. We approve prospective R&D projects after analysis of the cost and benefits associated with the potential product. Costs in R&D expense include, among other items, salaries, materials, utilities, and administrative costs.
F-13
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Earnings per Share
— We calculate basic and
diluted earnings per common share in accordance with the provisions of ASC 260-10,
Earnings Per Share
. Basic earnings per common share equals net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings
per common share equals net income divided by the weighted average number of common shares outstanding during the period, including the effect of outstanding stock options and other stock-based instruments if their effect is dilutive.
The following table provides a reconciliation of the net income amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per common share (in thousands, except per share data):
|
For the Year Ended April 30,
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
Basic earnings
|
$
|
|
20,128
|
|
|
|
54,061
|
|
|
$
|
|
0.37
|
|
|
$
|
|
127,854
|
|
|
|
55,930
|
|
|
$
|
|
2.29
|
|
|
$
|
|
93,958
|
|
|
|
54,765
|
|
|
$
|
|
1.72
|
|
Effect of dilutive stock awards
|
|
—
|
|
|
|
773
|
|
|
|
—
|
|
|
|
—
|
|
|
|
961
|
|
|
|
|
(0.04
|
)
|
|
|
—
|
|
|
|
1,200
|
|
|
|
|
(0.04
|
)
|
Diluted earnings
|
$
|
|
20,128
|
|
|
|
54,834
|
|
|
$
|
|
0.37
|
|
|
$
|
|
127,854
|
|
|
|
56,891
|
|
|
$
|
|
2.25
|
|
|
$
|
|
93,958
|
|
|
|
55,965
|
|
|
$
|
|
1.68
|
|
All of our outstanding stock options and restricted stock units, or RSUs, were included in the computation of diluted earnings per share for the years ended April 30, 2018, 2017, and 2016.
Valuation of Long-lived Tangible and Intangible Assets
— We evaluate the recoverability of long-lived assets, or asset groups, whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. When such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values are reduced to fair value and this adjusted carrying value becomes the asset’s new cost basis. We determine fair value primarily using future anticipated cash flows that are directly associated with and are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved.
We have significant long-lived tangible and intangible assets, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The most significant long-lived tangible and intangible assets, other than goodwill, are property, plant, and equipment, developed technology, customer relationships, patents, trademarks, and trade names. We amortize all finite-lived intangible assets either on a straight-line basis or based upon patterns in which we expect to utilize the economic benefits of such assets. We initially determine the values of intangible assets by a risk-adjusted, discounted cash flow approach. We assess the potential impairment of identifiable intangible assets and fixed assets whenever events or changes in circumstances indicate that the carrying values may not be recoverable and at least annually. Factors we consider important, which could trigger an impairment of such assets, include the following:
|
•
|
significant underperformance relative to historical or projected future operating results;
|
|
•
|
significant changes in the manner or use of the assets or the strategy for our overall business;
|
|
•
|
significant negative industry or economic trends;
|
|
•
|
a significant decline in our stock price for a sustained period; and
|
|
•
|
a decline in our market capitalization below net book value.
|
Future adverse changes in these or other unforeseeable factors could result in an impairment charge that could materially impact future results of operations and financial position in the reporting period identified. No material impairment charges were recorded in fiscal 2018, 2017, or 2016 based on the review of long-lived tangible and intangible assets.
F-14
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
In accordance with ASC 350,
Intangibles-Goodwill and Other,
we test goodwill for impairment on an annual basis on February 1 and between annual tests if indicators of potential impairment exist. The impairment test compares the fair value of the operating units to their carrying amounts to assess whether impairmen
t is present. We have reviewed the provisions of ASC 280-10,
Segment Reporting Topic,
with respect to the criteria necessary to evaluate the number of reporting units that exist. Based on our review of ASC 280-10-50, we have determined that we operate in t
wo reporting segments: Firearms and Outdoor Products & Accessories. Our Firearms reporting segment is one operating segment while our Outdoor Products & Accessories reporting segment has two operating segments: Outdoor Products & Accessories and Electro-Op
tics, which have been aggregated into one reporting segment. As of April 30, 2018, we had $191.3 million of goodwill
.
We estimate the fair value of our Firearms, Outdoor Products & Accessories, and Electro-Optics operating units using an equal weighting of the fair values derived from the income approach and the market approach because we believe a market participant would equally weight both approaches when valuing the operating units. The income approach is based on the projected cash flows that are discounted to their present value using discount rates that consider the timing and risk of the forecasted cash flows. Fair value is estimated using internally developed forecasts and assumptions. The discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. Other significant assumptions include revenue growth rates, profitability projections, and terminal value growth rates. The market approach estimates fair values based on the determination of appropriate publicly traded market comparison companies and market multiples of revenue and earnings derived from those companies with similar operating and investment characteristics as the operating unit being valued. Finally, we compare and reconcile our overall fair value to our market capitalization in order to assess the reasonableness of the calculated fair values of our operating units. We recognize an impairment loss for goodwill if the implied fair value of goodwill is less than the carrying value. The fair values of all reporting units reflect the decrease in the federal statutory income tax rate as a result of the Tax Cuts and Jobs Act, or Tax Reform, that was recently enacted in the United States. As of our valuation date, our Firearms operating unit had $18.5 million of goodwill and its fair value significantly exceeded its carrying value. Our Outdoor Products & Accessories operating unit had $119.8 million of goodwill and its fair value exceeded its carrying value by 2.0%. Our Electro-Optics operating unit had $53.0 million of goodwill and its fair value exceeded its carrying value by 1.6%. Although we concluded that there was no impairment on the goodwill associated with our operating units as of April 30, 2018, we will continue to closely monitor their performance and related market conditions for future indicators of potential impairment and reassess accordingly. Our assumptions related to the development of fair value could deviate materially from actual results and forecasts used to support asset carrying values may change in the future, which could result in non-cash charges that would adversely affect our financial results of operations, specifically as it relates to our Outdoor Products & Accessories and Electro-Optics operating units.
Income Taxes
— We use the asset and liability approach for financial accounting and reporting income taxes. The provision for income taxes is based upon income reported in the accompanying consolidated financial statements as required by ASC 740-10,
Accounting for Income Taxes.
We determine deferred tax assets and liabilities based on temporary differences between financial reporting and tax bases in assets and liabilities and measure them by applying enacted rates and laws expected to be in place when the deferred items become subject to income tax or deductible for income tax purposes. We recognize the effect on deferred taxes and liabilities of a change in tax rates in the period that includes the enactment date. In assessing the realization of our deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred income tax assets depends upon generating future taxable income during the periods in which our temporary differences become deductible and before our net operating loss carryforwards expire. We evaluate the recoverability of our deferred income tax assets by assessing the need for a valuation allowance on a quarterly basis. If we determine that it is more likely than not that our deferred income tax assets will not be recovered, we establish a valuation allowance against some or all of our deferred income tax assets. Recording or reversing a valuation allowance could have a significant effect on our future results of operations and financial position.
Warranty
— We generally provide a limited one-year warranty and a lifetime service policy to the original purchaser of our new firearm products. We either provide a limited one year or limited lifetime warranty program to the original purchaser of most of our outdoor products and accessories products and we will repair or replace any of our electro-optics products or parts that are found to be defective under normal use and service with an item of equivalent value, at our option, without charge during the warranty period. We provide for estimated warranty obligations in the period in which we recognize the related revenue. We quantify and record an estimate for warranty-related costs based on our actual historical claims experience and current repair costs. We make adjustments to accruals as warranty claims data and historical experience warrant. Should we experience actual claims and repair costs that are higher than the estimated claims and repair costs used to calculate the provision, our operating results for the period or periods in which such returns or additional costs materialize would be adversely impacted.
F-15
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
From time to time, we have experienced certain manufacturing and
design issues with respect to some of our firearms and have initiated some product recalls and safety alerts in the past.
In November 2011, we initiated a recall of all Thompson/Center Arms Venture rifles manufactured since the products’ introduction in mid-2009. In June 2013, we also initiated a recall of all Thompson/Center Arms bolt action rifles manufactured since the products’ introduction in 2007. In April 2018, we initiated a consumer advisory for certain models of our M&P Shield EZ pistols because in rare circumstances the safety on the pistol will move from the fire position to the “safety on” position when using ammunition that produces a high level of felt recoil. In May 2018, we initiated a recall of certain models of our electro-optics products that incorporated diodes manufactured by a particular third party because the diodes failed to comply with a Food and Drug Administration, or FDA, standard for laser products. We have made efforts to notify all consumers that may be impacted by this recall. The remaining cost of all recalls, safety alerts, and consumer advisories is $3.5 million, which is recorded in the accrued warranty balance.
Warranty expense for the fiscal years ended April 30, 2018, 2017, and 2016 amounted to $5.8 million, $1.3 million, and $2.5 million, respectively.
The following table sets forth the change in accrued warranties, a portion of which is recorded as a non-current liability, in the fiscal years ended April 30, 2018, 2017, and 2016 (in thousands):
|
|
|
|
|
Balance as of April 30, 2016
|
$
|
|
8,403
|
|
Warranties issued and adjustments to provisions
|
|
|
3,769
|
|
Changes related to preexisting product recall accruals
|
|
|
(2,437
|
)
|
Warranties assumed in acquisition
|
|
|
228
|
|
Warranty claims
|
|
|
(4,419
|
)
|
Balance as of April 30, 2017
|
|
|
5,544
|
|
Warranties issued and adjustments to provisions
|
|
|
5,834
|
|
Warranty claims
|
|
|
(3,865
|
)
|
Balance as of April 30, 2018
|
$
|
|
7,513
|
|
Sales and Promotional Related Expenses
— We present product sales in our consolidated financial statements, net of customer promotional program costs that depend upon the volume of sales. For promotional program costs that are not dependent on the volume of sales, we record promotional costs in cost of goods sold. The total of all our promotional programs amounted to $58.2 million, $37.3 million, and $20.7 million for the fiscal years ended April 30, 2018, 2017, and 2016, respectively. We have a co-op advertising program at the retail level. We expensed costs amounting to $23.3 million, $21.3 million, and $6.5 million for fiscal 2018, 2017, and 2016, respectively, as selling and marketing expenses.
Shipping and Handling
— In the accompanying consolidated financial statements, we included amounts billed to customers for shipping and handling in net sales. In our Firearms segment, we include costs relating to shipping and handling charges, including inbound freight charges, internal transfer costs, and the other costs of our distribution network, in cost of goods sold. In our Outdoor Products & Accessories segment, inbound freight charges and internal transfer costs are included in cost of goods sold; however, costs incurred to distribute products to customers is included in general and administrative expenses.
Insurance Reserves
— We are self-insured through retentions or deductibles for the majority of our workers’ compensation, automobile, general liability, product liability, and group health insurance programs. Self-insurance amounts vary up to $10.0 million per occurrence; however, we believe the likelihood of reaching the maximum per occurrence limit is remote. We record our liability for estimated premiums and incurred losses in the accompanying consolidated financial statements on an undiscounted basis.
F-16
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Recently Issued Accounting
Standard
—
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606)
, or ASU 2014-09. The core principle of ASU 2014-09 is that an entity should recognize r
evenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for interim reporting periods
beginning after December 15, 2017 and early adoption is permitted.
Additionally, in March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,
which clarifies the identification o
f performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
(Topic 606),
which provides clarifying guidance in certain narrow areas and adds some practica
l expedients. The effective dates for these ASU’s is the same as the effective date for ASU No. 2014-09.
We have evaluated the new standard against our existing accounting policies and practices, including reviewing standard purchase orders, invoices, shipping terms, and agreements with customers. We will adopt the new standard in the first quarter of fiscal 2019 using the modified retrospective approach and will not restate our prior year consolidated financial statements. Based on this adoption, we will modify the timing of revenue recognition related to certain of our sales promotions that involve the shipment of free goods. We will recognize the cumulative effect of adopting this standard as an adjustment to our opening retained earnings. We expect the adjustment to retained earnings to be approximately $5.5 million, with an expected impact to fiscal 2019 revenue of $22.5 million relating to fiscal 2018 sales promotions, and an immaterial impact to net income on an ongoing basis. Prior periods will not be retrospectively restated.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
or ASU 2016-02, which amends the existing guidance to require lessees to recognize lease assets and lease liabilities arising from operating leases in a classified balance sheet. The amendments of this ASU are effective for financial statements for annual periods and interim periods within those annual periods beginning after December 15, 2018, and early adoption is permitted. We have begun to collect lease contract information from our subsidiaries and are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, or ASU 2017-04, which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds it fair value, not to exceed the amount of the goodwill. The requirements of ASU 2017-04 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have elected to early adopt this standard during the year ended April 30, 2017, which had no impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement —Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects resulting from Tax Reform that are stranded in accumulated other comprehensive income. This standard also requires certain disclosures about stranded tax effects. This ASU, however, does not change the underlying guidance that requires the effects of a change in tax laws or rates to be included from continuing operations. The requirements of this ASU are effective for annual and interim reporting periods beginning after December 15, 2018, and early adoption is permitted. The new guidance can be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the corporate income tax rate is recognized. We have elected to early adopt this standard during the year ended April 30, 2018, which did not have a material impact on our consolidated financial statements.
F-17
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
4. Go
odwill
The changes in the carrying amount of goodwill by reporting segment are as follows (in thousands):
|
|
|
|
|
|
Outdoor
Products &
|
|
|
|
|
|
|
|
Firearms
Segment
|
|
|
Accessories
Segment
|
|
|
Total
Goodwill
|
|
Balance as of April 30, 2016
|
|
$
|
13,770
|
|
|
$
|
62,587
|
|
|
$
|
76,357
|
|
Adjustments
|
|
|
—
|
|
|
|
(141
|
)
|
|
|
(141
|
)
|
Acquisitions
|
|
|
—
|
|
|
|
92,801
|
|
|
|
92,801
|
|
Balance as of April 30, 2017
|
|
|
13,770
|
|
|
|
155,247
|
|
|
|
169,017
|
|
Adjustments
|
|
|
—
|
|
|
|
10,249
|
|
|
|
10,249
|
|
Acquisitions
|
|
|
4,720
|
|
|
|
7,301
|
|
|
|
12,021
|
|
Balance as of April 30, 2018
|
|
$
|
18,490
|
|
|
$
|
172,797
|
|
|
$
|
191,287
|
|
For more information regarding goodwill impairment testing, see Note 3 —
Significant Accounting Policies — Valuation of Long-lived Tangible and Intangible Assets
to our consolidated financial statements.
5. Notes and Loans Payable and Financing Arrangements
Credit Facilities
— On June 15, 2015, we and certain of our domestic subsidiaries entered into an unsecured credit facility, or the Credit Agreement, with TD Bank, N.A. and other lenders, or the Lenders, which included a $175.0 million revolving line of credit, or the Revolving Line, and a $105.0 million term loan, or the Term Loan, of which $87.7 million remains outstanding as of April 30, 2018. The Revolving Line provides for availability for general corporate purposes with borrowings to bear interest at a variable rate equal to LIBOR or prime plus an applicable margin based on our consolidated leverage ratio, at our election. On October 27, 2016, we entered into a second amendment to our Credit Agreement, or the Second Amendment, which, among other things, increased the Revolving Line to $350.0 million, increased the option to expand the credit commitment to $150.0 million, and extended the maturity of the Revolving Line from June 15, 2020 to October 27, 2021. Other than the changes described in the Second Amendment, we otherwise remain subject to the terms of the Credit Agreement, as described below. We incurred $525,000 of debt issuance costs related to this amendment and have recorded these costs in notes payable in the consolidated balance sheet.
As of April 30, 2018, we had $25.0 million of borrowings outstanding on the Revolving Line, which bore interest at 4.15%, equal to the LIBOR rate plus an applicable margin. The Term Loan, which bears interest at a variable rate, was entered into for the purpose of redeeming the entire $100.0 million of then outstanding 5.875% Senior Notes due 2017, or the 5.875% Senior Notes. The Term Loan requires principal payments of $6.3 million per annum plus interest, payable quarterly. Any remaining outstanding amount on the maturity date of June 15, 2020 will be due in full. Concurrent with closing the Term Loan, we redeemed our then outstanding 5.875% Senior Notes for a $2.9 million call premium, which is included in interest expense, plus accrued and unpaid interest. As part of the redemption, in fiscal 2016, we wrote off $1.7 million of debt issuance costs related to the 5.875% Senior Notes.
We were required to obtain interest rate protection on the Term Loan covering not less than 75% of the aggregate outstanding principal balance of the Term Loan. Accordingly, on June 18, 2015, we entered into an interest rate swap agreement, which expires on June 15, 2020, that covered 100% of the $105.0 million of floating rate debt. On July 6, 2015, we executed an interest rate swap pursuant to such agreement, which requires us to pay interest at a defined rate of 1.56% while receiving interest at a defined variable rate of one-month LIBOR (0.188% at July 31, 2015). This swap, when combined with the applicable margin based on our consolidated leverage ratio, effectively fixed our interest rate on the Term Loan, which is subject to change based on changes in our consolidated leverage ratio. As of April 30, 2018, our interest rate on the Term Loan was 4.14%.
F-18
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
We recognize derivatives as either assets or liabilities on our consolidated balance sheets at fair value. The accounting for changes in the fair value (i.e., unrealized gains or losses) of a derivative instrument depends on whether it has been de
signated and qualifies as part of a hedging relationship and on the type of hedging relationship. Derivatives that do not qualify for hedge accounting must be adjusted to fair value through earnings. Our interest rate swap agreement is considered effective
and qualifies as a cash flow hedge. The effective portion of the gain or loss on the derivative that is designated and qualifies as a cash flow hedge is recorded as a component of accumulated other comprehensive income or loss and reclassified into earnin
gs in the same period or periods during which the hedged transaction affects earnings. As of April 30, 2018, the interest rate swap was considered effective and had no effect on earnings. The fair value of the interest rate swap on April 30, 2018 and 2017
was an asset of $2.1 million and $572,000, respectively, and was recorded in other assets on our consolidated balance sheet. We do not expect the interest rate swap to have any material effect on earnings within the next 12 months.
2018 Senior Notes
– During fiscal 2015, we issued an aggregate of $75.0 million of 5.000% Senior Notes due 2018, or the 2018 Senior Notes, to various institutional investors pursuant to the terms and conditions of an indenture and purchase agreements. The 2018 Senior Notes bear interest at a rate of 5.000% per annum payable on January 15 and July 15 of each year, beginning on January 15, 2015. We incurred $2.3 million of debt issuance costs related to the issuance of the 2018 Senior Notes. As discussed below, the 2018 Senior Notes were redeemed on March 8, 2018 with proceeds from the issuance of 5.000% Senior Notes due 2020.
As part of the redemption, in fiscal 2018, we wrote off $226,000 of debt issuance costs related to the 2018 Senior Notes.
2020 Senior Notes
– On February 28, 2018, we issued an aggregate of $75.0 million of 5.000% Senior Notes due 2020, or the 2020 Senior Notes, to various institutional investors pursuant to the terms and conditions of an indenture, or the 2020 Senior Notes Indenture, and purchase agreements. The 2020 Senior Notes bear interest at a rate of 5.000% per annum payable on February 28 and August 28 of each year, beginning on August 28, 2018. We incurred 158,000 of debt issuance costs related to the issuance of the 2020 Senior Notes.
At any time prior to February 28, 2019, we may, at our option, upon not less than 30 nor more than 60 days’ prior notice, redeem all or a portion of the 2020 Senior Notes at a redemption price of 102.500% of the principal amount of the 2020 Senior Notes to be redeemed plus accrued and unpaid interest as of the applicable redemption date. On or after February 28, 2019, we may, at our option, upon not less than 30 nor more than 60 days’ prior notice, redeem all or a portion of the 2020 Senior Notes at a redemption price of 100.000% of the principal amount of the 2020 Senior Notes to be redeemed plus accrued and unpaid interest as of the applicable redemption date. Subject to certain restrictions and conditions, we may be required to make an offer to repurchase the 2020 Senior Notes from the holders of the 2020 Senior Notes in connection with a change of control or disposition of assets. If not redeemed by us or repaid pursuant to the holders’ right to require repurchase, the 2020 Senior Notes mature on August 28, 2020.
The 2020 Senior Notes are general, unsecured obligations of our company. The 2020 Senior Notes Indenture contains certain affirmative and negative covenants, including limitations on restricted payments (such as share repurchases, dividends, and early payment of indebtedness), limitations on indebtedness, limitations on the sale of assets, and limitations on liens. Payments that would otherwise be characterized as restricted payments are permitted under the 2020 Senior Notes Indenture in an amount not to exceed 50% of our consolidated net income for the period from the issue date to the date of the restricted payment, provided that at the time of making such payments, (a) no default has occurred or would result from the making of such payments, and (b) we are able to satisfy the debt incurrence test under the 2020 Senior Notes Indenture, or the 2020 Senior Notes Lifetime Aggregate Limit. In addition, the 2020 Senior Notes Indenture provides for other exceptions to the restricted payments covenant, each of which are independent of the 2020 Senior Notes Lifetime Aggregate Limit. Among such exceptions are (i) the ability to make share repurchases each fiscal year in an amount not to exceed the lesser of (A) $50.0 million in any fiscal year or (B) 75.0% of our consolidated net income for the previous four consecutive published fiscal quarters prior to the date of the determination of such consolidated net income, and (ii) share repurchases over the life of the 2020 Senior Notes in an aggregate amount not to exceed $75.0 million.
F-19
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The limitation on indebtedness in the 2020 Senior Notes Indenture is only applicable at such time that the consolidated coverage ratio (as set forth in the 2020 Senior Notes Indenture) for us and our restricted subsidiaries is less than 3.00
to 1.00. In general, as set forth in the 2020 Senior Notes Indenture, the consolidated coverage ratio is determined by comparing our prior four quarters’ consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) to our consolida
ted interest expense. The carrying value of our 2020 Senior Notes as of April 30, 2018 approximated the fair value in considering Level 2 inputs within the hierarchy.
Debt Issuance Costs
— We recorded, in notes payable, $158,000, $525,000, and $1.0 million of debt issuance costs for the fiscal years ended April 30, 2018, 2017, and 2016, respectively. These costs are being amortized to expense over the life of the credit facility or the 2020 Senior Notes Indenture. In total, we amortized $1.1 million, $918,000, and $2.7 million to interest expense for all debt issuance costs in fiscal 2018, 2017, and 2016, respectively, including write-offs related to extinguishment.
The Credit Agreement for our credit facility contains financial covenants relating to maintaining maximum leverage and minimum debt service coverage. The 2020 Senior Notes Indenture contains a financial covenant relating to times interest earned.
Letters of Credit
— At April 30, 2018, we had outstanding letters of credit aggregating $1.0 million.
6. Net Sales
The following table sets forth the breakdown of net sales for the fiscal years ended April 30, 2018, 2017, and 2016 (in thousands):
|
For the Years Ended April 30,
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Handguns
|
$
|
|
326,290
|
|
|
$
|
|
556,566
|
|
|
$
|
|
485,413
|
|
Long Guns
|
|
|
90,222
|
|
|
|
|
179,612
|
|
|
|
|
127,607
|
|
Other Products & Services
|
|
|
32,474
|
|
|
|
|
36,819
|
|
|
|
|
39,045
|
|
Firearms Segment
|
|
|
448,986
|
|
|
|
|
772,997
|
|
|
|
|
652,065
|
|
Outdoor Products & Accessories Segment
|
|
|
157,864
|
|
|
|
|
130,191
|
|
|
|
|
70,843
|
|
Total Net Sales
|
$
|
|
606,850
|
|
|
$
|
|
903,188
|
|
|
$
|
|
722,908
|
|
We sell our products and services in our Firearms segment under our Smith & Wesson, M&P, Performance Center, Gemtech, Thompson/Center Arms, and Smith & Wesson Precision Components brands. Depending upon the product or service, our firearm customers primarily include distributors; federal, state, and municipal law enforcement agencies and officers; government and military agencies; businesses; and retailers. We sell our outdoor products & accessories products under our Caldwell, Wheeler, Tipton, Frankford Arsenal, Smith & Wesson, M&P, Thompson/Center Arms, Lockdown, Hooyman, BOG-POD, Golden Rod, Non-Typical, Crimson Trace, Imperial, Schrade, Old Timer, Bubba Blade, UST, and KeyGear brands. Our outdoor products and accessories customers are generally, distributors, retailers, and consumers.
We sell our products worldwide. The following table sets forth the breakdown of export net sales included in the above table. Our export net sales accounted for 5%, 3%, and 3% of total net sales for the fiscal years ended April 30, 2018, 2017, and 2016, respectively (in thousands):
|
For the Years Ended April 30,
|
|
|
Region
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Europe
|
$
|
|
9,586
|
|
|
$
|
|
11,545
|
|
|
$
|
|
8,913
|
|
|
Asia
|
|
|
4,725
|
|
|
|
|
4,046
|
|
|
|
|
3,989
|
|
|
Latin America
|
|
|
2,038
|
|
|
|
|
1,778
|
|
|
|
|
2,593
|
|
|
All others international
|
|
|
12,388
|
|
|
|
|
10,418
|
|
|
|
|
9,120
|
|
|
Total international net sales
|
$
|
|
28,737
|
|
|
$
|
|
27,787
|
|
|
$
|
|
24,615
|
|
|
F-20
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Our Firearm and Outdoor Products & Accessories segments own tooling that is located at various suppliers in Asia and North America.
7. Advertising Costs
We expense advertising costs, primarily consisting of magazine advertisements, printed materials, and television advertisements, either as incurred or upon the first occurrence of the advertising. Advertising expense, included in selling and marketing expenses for the fiscal years ended April 30, 2018, 2017, and 2016, amounted to $25.8 million, $22.3 million, and $21.8 million, respectively.
8. Property, Plant, and Equipment
The following table summarizes property, plant, and equipment as of April 30, 2018 and 2017 (in thousands):
|
April 30, 2018
|
|
|
April 30, 2017
|
|
Machinery and equipment
|
$
|
|
251,706
|
|
|
$
|
|
242,479
|
|
Software and hardware
|
|
|
43,097
|
|
|
|
|
39,526
|
|
Building and improvements
|
|
|
29,908
|
|
|
|
|
28,110
|
|
Land and improvements
|
|
|
3,845
|
|
|
|
|
3,573
|
|
|
|
|
328,556
|
|
|
|
|
313,688
|
|
Less: Accumulated depreciation and amortization
|
|
|
(198,545
|
)
|
|
|
|
(170,538
|
)
|
|
|
|
130,011
|
|
|
|
|
143,150
|
|
Construction in progress
|
|
|
29,114
|
|
|
|
|
6,535
|
|
Total property, plant, and equipment, net
|
$
|
|
159,125
|
|
|
$
|
|
149,685
|
|
Depreciation of tangible assets and amortization of software expense amounted to $30.0 million, $29.2 million, and $27.8 million for the fiscal years ended April 30, 2018, 2017, and 2016, respectively. The large increase in construction in progress is due to the costs incurred for the purchase of land and costs related to the design and construction of our national logistics facility.
The following table summarizes depreciation and amortization expense, which includes amortization of intangibles and debt financing costs, by line item for the fiscal years ended April 30, 2018, 2017, and 2016 (in thousands):
|
For the Years Ended April 30,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cost of sales
|
$
|
|
24,582
|
|
$
|
|
24,744
|
|
$
|
|
22,332
|
|
Research and development
|
|
|
557
|
|
|
|
428
|
|
|
|
1,136
|
|
Selling and marketing
|
|
|
619
|
|
|
|
424
|
|
|
|
221
|
|
General and administrative (a)
|
|
|
25,212
|
|
|
|
23,699
|
|
|
|
14,869
|
|
Interest expense
|
|
|
1,105
|
|
|
|
918
|
|
|
|
2,679
|
|
Total depreciation and amortization
|
$
|
|
52,075
|
|
$
|
|
50,213
|
|
$
|
|
41,237
|
|
(a)
|
General and administrative expenses included $20.8 million, $18.4 million, and $9.9 million of amortization for the fiscal years ended April 30, 2018, 2017, and 2016, respectively, recorded as a result of our acquisitions.
|
F-21
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
9.
Inventories
The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or market, as of April 30, 2018 and 2017 (in thousands):
|
|
April 30, 2018
|
|
|
April 30, 2017
|
|
Finished goods
|
|
$
|
91,480
|
|
|
$
|
61,080
|
|
Finished parts
|
|
|
42,075
|
|
|
|
51,177
|
|
Work in process
|
|
|
7,657
|
|
|
|
9,379
|
|
Raw material
|
|
|
12,141
|
|
|
|
10,046
|
|
Total inventories
|
|
$
|
153,353
|
|
|
$
|
131,682
|
|
10. Intangible Assets
The following table presents a summary of intangible assets as of April 30, 2018 and 2017 (in thousands):
|
|
April 30, 2018
|
|
|
April 30, 2017
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Customer relationships (a)
|
|
$
|
92,360
|
|
|
$
|
(28,252
|
)
|
|
$
|
64,108
|
|
|
$
|
105,260
|
|
|
$
|
(16,463
|
)
|
|
$
|
88,797
|
|
Developed technology
|
|
|
21,130
|
|
|
|
(8,178
|
)
|
|
|
12,952
|
|
|
|
19,430
|
|
|
|
(5,436
|
)
|
|
|
13,994
|
|
Patents, trademarks, and trade names
|
|
|
56,718
|
|
|
|
(22,099
|
)
|
|
|
34,619
|
|
|
|
53,308
|
|
|
|
(15,619
|
)
|
|
|
37,689
|
|
Backlog
|
|
|
1,150
|
|
|
|
(1,150
|
)
|
|
|
—
|
|
|
|
1,150
|
|
|
|
(1,150
|
)
|
|
|
—
|
|
|
|
|
171,358
|
|
|
|
(59,679
|
)
|
|
|
111,679
|
|
|
|
179,148
|
|
|
|
(38,668
|
)
|
|
|
140,480
|
|
Patents in progress
|
|
|
855
|
|
|
|
—
|
|
|
|
855
|
|
|
|
611
|
|
|
|
—
|
|
|
|
611
|
|
Total definite-lived intangible assets
|
|
|
172,213
|
|
|
|
(59,679
|
)
|
|
|
112,534
|
|
|
|
179,759
|
|
|
|
(38,668
|
)
|
|
|
141,091
|
|
Indefinite-lived intangible assets
|
|
|
226
|
|
|
|
—
|
|
|
|
226
|
|
|
|
226
|
|
|
|
—
|
|
|
|
226
|
|
Total intangible assets
|
|
$
|
172,439
|
|
|
$
|
(59,679
|
)
|
|
$
|
112,760
|
|
|
$
|
179,985
|
|
|
$
|
(38,668
|
)
|
|
$
|
141,317
|
|
(a)
|
Changes to the gross carrying amount of customer relationships is related to purchase accounting adjustments. For more information regarding the changes in valuation of customer relations, see Note 2
—
Acquisitions
to our consolidated financial statements.
|
We amortize intangible assets with determinable lives over a weighted-average period of approximately five years. The weighted-average periods of amortization by intangible asset class is approximately five years for customer relationships, six years for developed technology, and five years for patents, trademarks, and trade names. Amortization expense, excluding amortization of deferred financing costs, amounted to $21.0 million, $20.1 million, and $10.7 million for the fiscal years ended April 30, 2018, 2017, and 2016, respectively.
The following table represents future expected amortization expense as of April 30, 2018, which will primarily be recorded in our Outdoor Products & Accessories segment (in thousands):
Fiscal
|
|
Amount
|
|
2019
|
|
$
|
21,971
|
|
2020
|
|
|
19,095
|
|
2021
|
|
|
16,488
|
|
2022
|
|
|
14,109
|
|
2023
|
|
|
11,747
|
|
Thereafter
|
|
|
28,269
|
|
Total
|
|
$
|
111,679
|
|
F-22
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
11. Accrued Expenses
The following table sets forth other accrued expenses as of April 30, 2018 and 2017 (in thousands):
|
April 30, 2018
|
|
|
April 30, 2017
|
|
Accrued rebates and promotions
|
$
|
|
21,339
|
|
|
$
|
|
26,750
|
|
Accrued employee benefits
|
|
|
5,741
|
|
|
|
|
4,574
|
|
Accrued taxes other than income
|
|
|
3,933
|
|
|
|
|
7,758
|
|
Accrued professional fees
|
|
|
2,332
|
|
|
|
|
2,079
|
|
Current portion of capital lease obligation
|
|
|
431
|
|
|
|
|
1,022
|
|
Interest payable
|
|
|
930
|
|
|
|
|
1,361
|
|
Accrued other
|
|
|
6,926
|
|
|
|
|
8,142
|
|
Total accrued expenses
|
$
|
|
41,632
|
|
|
$
|
|
51,686
|
|
12. Fair Value Measurement
We follow the provisions of ASC 820-10,
Fair Value Measurements and Disclosures Topic
, or ASC 820-10, for our financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
Financial assets and liabilities recorded on the accompanying consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1
— Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities).
Our cash and cash equivalents, which are measured at fair value on a recurring basis, totaled $48.9 million and $61.5 million as of April 30, 2018 and 2017, respectively. We utilized Level 1 of the value hierarchy to determine the fair values of these assets.
Level 2
— Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:
|
•
|
quoted prices for identical or similar assets or liabilities in non-active markets (such as corporate and municipal bonds which trade infrequently);
|
|
•
|
inputs other than quoted prices that are observable for substantially the full term of the asset or liability (such as interest rate and currency swaps); and
|
|
•
|
inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (such as certain securities and derivatives).
|
F-23
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The carrying value of our Term Loan approximated the fair value as of April 30,
2018, in considering Level 2 inputs within the hierarchy. The carrying value of our 2020 Senior Notes as of April 30, 2018 approximated the fair value in considering Level 2 inputs within the hierarchy as our 2020 Senior Notes are not frequently traded. Th
e fair value of our interest rate swap was estimated by a third party using inputs that are observable or that can be corroborated by observable market data, such as interest rate yield curves, and, therefore, are classified within Level 2 of the valuation
hierarchy. For more information regarding the interest rate swap, refer to Note 5
—
Notes and Loans Payable and Financing Arrangements
to our consolidated financial statements.
Level 3
— Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our assumptions about the assumptions a market participant would use in pricing the asset or liability.
The acquisition-related contingent consideration liability represents the estimated fair value of additional future earn-outs payable for acquisitions of businesses that included earn-out clauses. The valuation of the contingent consideration will be evaluated on an ongoing basis and is based on management estimates and entity-specific assumptions which are considered Level 3 inputs.
In connection with the purchase of UST, up to an additional $2.0 million may be paid over a period of two years, contingent upon the financial performance of the acquired business. The valuation of this contingent consideration liability was established in accordance with ASC 805 —
Business Combinations
. The initial fair value of this contingent consideration liability was $1.7 million. Based on the current forecasted revenue, during the year ended April 30, 2018, we recorded a $1.6 million reduction in the fair value of this contingent consideration liability because we do not expect that the acquired business will achieve the performance metrics. This reduction was recorded in other income on the condensed consolidated statements of income. As of April 30, 2018, the fair value of this contingent liability was $60,000, which was recorded as a non-current liability.
In connection with the Gemtech acquisition, up to a maximum of $17.1 million may be paid contingent upon the cumulative three year sales volume of the acquired business. The valuation of this contingent consideration liability was established in accordance with ASC 805 —
Business Combinations
. Based on current forecasted revenue, we believe it is unlikely that the acquired business will achieve the performance metrics. Therefore, as of April 30, 2018, the contingent liability was recorded at a fair value of $100,000 in non-current liabilities.
13. Self-Insurance Reserves
As of April 30, 2018 and 2017, we had reserves for workers’ compensation, product liability, municipal liability, and medical/dental costs totaling $9.2 million and $8.7 million, respectively, of which $4.8 million was classified as other non-current liabilities. As of April 30, 2018 and 2017, $3.9 million and $3.6 million, respectively, were included in accrued expenses on the accompanying consolidated balance sheets. In addition, as of April 30, 2018 and 2017, $590,000 of workers’ compensation recoverable was classified as other assets. While we believe these reserves to be adequate, it is possible that the ultimate liabilities will exceed such estimates.
The following table is a summary of the activity in the workers’ compensation, product liability, municipal liability, and medical/dental reserves in the fiscal years ended April 30, 2018, 2017, and 2016 (in thousands):
|
For the Year Ended April 30,
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
$
|
|
8,663
|
|
|
$
|
|
10,082
|
|
|
$
|
|
9,610
|
|
Additional provision charged to expense
|
|
|
22,802
|
|
|
|
|
15,801
|
|
|
|
|
16,781
|
|
Payments
|
|
|
(22,292
|
)
|
|
|
|
(17,220
|
)
|
|
|
|
(16,309
|
)
|
Ending balance
|
$
|
|
9,173
|
|
|
$
|
|
8,663
|
|
|
$
|
|
10,082
|
|
F-24
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
It is our policy to provide an estimate for loss as a result of expected adverse findings or legal settlements on product liability, municipal liability, workers’ compensation, and other matters when such losses are probable
and are reasonably estimable. It is also our policy to accrue for reasonable estimable legal costs associated with defending such litigation. While such estimates involve a range of possible costs, we determine, in consultation with counsel, the most like
ly cost within such range on a case-by-case basis. We also record receivables from insurance carriers relating to these matters when their collection is probable. As of April 30, 2018 and 2017, we had accrued reserves for product and municipal litigation l
iabilities of $3.4 million and $3.2 million, respectively (of which $2.9 million was non-current), consisting entirely of expected legal defense costs. In addition, as of April 30, 2018 and 2017, we had recorded receivables from insurance carriers related
to these liabilities of $1.9 million, nearly all of which has been classified as other assets.
14. Stockholders’ Equity
Treasury Stock
During fiscal 2017, our board of directors authorized the repurchase of up to $50.0 million of our common stock, subject to certain conditions, in the open market or in privately negotiated transactions until March 28, 2019. This share repurchase authorization is similar to the $50.0 million authorization from June 2015 under which we repurchased 2.6 million shares of common stock for $50.0 million in fiscal 2017. During the fiscal year ended April 30, 2018, there were no share repurchases under this stock repurchase program.
Incentive Stock and Employee Stock Purchase Plans
We have two stock incentive plans, or SPs: the 2004 Incentive Stock Plan and the 2013 Incentive Stock Plan. New grants under the 2004 Incentive Stock Plan have not been made since the approval of the 2013 Incentive Stock Plan at our September 23, 2013 annual meeting of stockholders. All new grants covering all participants are issued under the 2013 Incentive Stock Plan.
The 2013 Incentive Stock Plan authorizes the issuance of 3,000,000 shares, plus any shares that were reserved and remained available for grant and delivery under the 2004 Incentive Stock Plan as of September 23, 2013, the effective date of the 2013 Incentive Stock Plan. The plan permits the grant of options to acquire common stock, restricted stock awards, RSUs, stock appreciation rights, bonus stock and awards in lieu of obligations, performance awards, and dividend equivalents. Our board of directors, or a committee established by our board, administers the SPs, selects recipients to whom awards are granted, and determines the grants to be awarded. Options granted under the SPs are exercisable at a price determined by our board or committee at the time of grant, but in no event, less than fair market value of our common stock on the date granted. Grants of options may be made to employees and directors without regard to any performance measures. All options issued pursuant to the SPs are generally nontransferable and subject to forfeiture.
Unless terminated earlier by our board of directors, the 2013 Incentive Stock Plan will terminate at the earliest of (1) the tenth anniversary of the effective date of the 2013 Stock Plan, or (2) such time as no shares of common stock remain available for issuance under the plan and we have no further rights or obligations with respect to outstanding awards under the plan. The date of grant of an award is deemed to be the date upon which our board of directors or board committee authorizes the granting of such award.
Except in specific circumstances, grants vest over a period of three or four years and grants of stock options are exercisable for a period of 10 years. The plan also permits the grant of awards to non-employees, which our board of directors or committee has authorized in the past.
F-25
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The number of shares and weighted average exercise prices of options for
the fiscal years ended April 30, 2018, 2017, and 2016 are as follows:
|
For the Years Ended April 30,
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
Options outstanding, beginning of
year
|
|
335,160
|
|
|
$
|
6.58
|
|
|
|
389,360
|
|
|
$
|
6.16
|
|
|
|
1,879,630
|
|
|
$
|
6.37
|
|
Exercised during the period
|
|
(19,000
|
)
|
|
|
4.70
|
|
|
|
(54,200
|
)
|
|
|
3.57
|
|
|
|
(1,490,270
|
)
|
|
|
6.42
|
|
Options outstanding, end of period
|
|
316,160
|
|
|
$
|
6.69
|
|
|
|
335,160
|
|
|
$
|
6.58
|
|
|
|
389,360
|
|
|
$
|
6.16
|
|
Weighted average remaining
contractual life
|
3.16 years
|
|
|
|
|
|
|
4.01 years
|
|
|
|
|
|
|
5.04 years
|
|
|
|
|
|
Options exercisable, end of period
|
|
316,160
|
|
|
$
|
6.69
|
|
|
|
335,160
|
|
|
$
|
6.58
|
|
|
|
389,360
|
|
|
$
|
6.16
|
|
Weighted average remaining
contractual life
|
3.16 years
|
|
|
|
|
|
|
4.01 years
|
|
|
|
|
|
|
5.04 years
|
|
|
|
|
|
As of April 30, 2018, there were 4,746,149 shares available for grant under the 2013 Incentive Stock Plan. We use our unissued share pool for all shares issued for options, restricted stock awards, RSUs, performance share units, performance-based restricted stock units, or PSUs, and shares issued under our Employee Stock Purchase Plan, or ESPP.
The aggregate intrinsic value of outstanding and exercisable stock options as of April 30, 2018, 2017, and 2016 was $1.4 million, $5.2 million, and $6.1 million, respectively. The aggregate intrinsic value of the options exercised for the years ended April 30, 2018, 2017, and 2016 was $116,000, $1.3 million, and $27.2 million, respectively. At April 30, 2018, there was no unrecognized compensation cost of outstanding options.
The following table summarizes stock compensation expense by line item for the fiscal years ended April 30, 2018, 2017, and 2016 (in thousands):
|
|
For the Years Ended April 30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
Cost of sales
|
|
$
|
882
|
|
|
$
|
1,139
|
|
|
$
|
564
|
|
Research and development
|
|
|
187
|
|
|
|
217
|
|
|
|
169
|
|
Selling and marketing
|
|
|
382
|
|
|
|
801
|
|
|
|
494
|
|
General and administrative
|
|
|
6,364
|
|
|
|
6,433
|
|
|
|
5,245
|
|
Total stock-based compensation
|
|
$
|
7,815
|
|
|
$
|
8,590
|
|
|
$
|
6,472
|
|
We grant service-based RSUs to employees, consultants, and directors. The awards are made at no cost to the recipient. An RSU represents the right to acquire one share of our common stock and does not carry voting or dividend rights. Except in specific circumstances, RSU grants to employees generally vest over a period of three or four years with one-third or one-fourth of the units vesting, respectively, on each anniversary date of the grant date. The aggregate fair value of our RSU grants is amortized to compensation expense over the applicable vesting period.
F-26
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
We grant PSUs to our executive officers and certain management employees who are not executive officers. At the time of grant, we calculate the fair value of our PSUs us
ing the Monte-Carlo simulation. We incorporate the following variables into the valuation model:
|
|
For the Years Ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Grant date fair market value
|
|
|
|
|
|
|
|
|
|
|
|
|
American Outdoor Brands Corporation
|
|
$
|
11.11
|
|
|
$
|
21.89
|
|
|
$
|
21.93
|
|
Russell 2000 Index
|
|
$
|
1,557.89
|
|
|
$
|
1,417.13
|
|
|
$
|
1,140.40
|
|
Volatility (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
American Outdoor Brands Corporation
|
|
|
42.27
|
%
|
|
|
41.67
|
%
|
|
|
39.93
|
%
|
Russell 2000 Index
|
|
|
16.26
|
%
|
|
|
16.77
|
%
|
|
|
16.75
|
%
|
Correlation coefficient (b)
|
|
|
0.19
|
|
|
|
0.22
|
|
|
0.32
|
|
Risk-free interest rate (c)
|
|
|
2.61
|
%
|
|
|
1.44
|
%
|
|
|
0.93
|
%
|
Dividend yield (d)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
(a)
|
Expected volatility is calculated over the most recent period that represents the remaining term of the performance period as of the valuation date, or three years.
|
(b)
|
The correlation coefficient utilizes the same historical price data used to develop the volatility assumptions.
|
(c)
|
The risk-free interest rate is based on the yield of a zero-coupon U.S. Treasury bill, commensurate with the three-year performance period.
|
(d)
|
We do not expect to pay dividends in the foreseeable future.
|
The PSUs vest, and the fair value of such PSUs will be recognized, over the corresponding three-year performance period. Our PSUs have a maximum aggregate award equal to 200% of the target amount granted. Generally, the number of PSUs that may be earned depends upon the total stockholder return, or TSR, of our common stock compared with the TSR of the Russell 2000 Index, or RUT, over the three-year performance period. For PSUs, our stock must outperform the RUT by 5% in order for the target award to vest. In addition, there is a cap on the number of shares that can be earned under our PSUs, which is equal to six times the grant-date value of each award.
In certain circumstances, the vested awards will be delivered on the first anniversary of the applicable vesting date. We have applied a discount to the grant date fair value when determining the amount of compensation expense to be recorded for these RSUs and PSUs.
During the year ended April 30, 2018, we granted 157,700 PSUs to certain of our executive officers. We also granted 388,186 service-based RSUs during the year ended April 30, 2018, including 159,167 RSUs to certain of our executive officers, 52,826 RSUs to our directors, and 176,193 RSUs to non-executive officer employees. In addition, in connection with a 2014 grant of 105,000 PSUs (i.e., the target amount granted), which achieved 115.2% of the targeted award, we vested and delivered awards totaling 121,504 shares to certain of our executive officers. Compensation expense recognized related to grants of RSUs and PSUs was $7.1 million for the fiscal year ended April 30, 2018.
During the fiscal year ended April 30, 2018, we canceled 208,496 service-based RSUs and 39,429 PSUs as a result of the service period condition not being met and delivered 300,496 shares of common stock to current employees under vested RSUs and PSUs with a total market value of $6.2 million.
During the year ended April 30, 2017, we granted 153,100 PSUs to certain of our executive officers. We also granted 394,909 service-based RSUs during the year ended April 30, 2017, including 168,800 RSUs to certain of our executive officers, 24,896 RSUs to our directors, and 201,213 RSUs to non-executive officer employees. In addition, in connection with a 2013 grant of 118,500 PSUs (i.e., the target amount granted), which achieved 200.0% of the maximum aggregate award possible, we vested and delivered awards totaling 237,000 shares to certain of our executive officers. Compensation expense recognized related to grants of RSUs and PSUs was $7.8 million for the fiscal year ended April 30, 2017.
F-27
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
During the fiscal year ended April 30, 2017, we canceled 19,448 service-based RSUs as a result of the service period condition not being met and delivered 433,966
shares of common stock to current employees under vested RSUs and PSUs with a total market value of $11.7 million.
During the year ended April 30, 2016, we granted 137,775 PSUs to certain of our executive officers and 5,379 PSUs to non-executives officer employees. We also granted 321,692 service-based RSUs during the year ended April 30, 2016, including 117,100 RSUs to certain of our executive officers, 36,379 RSUs to our directors, and 168,213 RSUs to non-executive officer employees. In addition, in connection with a 2012 grant of 104,000 PSUs (i.e., the target amount granted), which achieved 173.3% of the maximum aggregate award possible, we vested and delivered awards totaling 180,231 shares to certain of our executive officers. Compensation expense recognized related to grants of RSUs and PSUs was $5.9 million for the fiscal year ended April 30, 2016.
During the fiscal year ended April 30, 2016, we canceled 66,185 service-based RSUs and 19,250 PSUs as a result of the service period condition not being met and delivered 430,768 shares of common stock to current employees under vested RSUs and PSUs with a total market value of $7.8 million.
The grant date fair value of RSUs and PSUs that vested in fiscal 2018 and 2017, was $5.0 million. The grant date fair value of RSUs and PSUs that vested in fiscal 2016 was $4.6 million.
A summary of activity for unvested RSUs and PSUs for fiscal years 2018, 2017, and 2016 is as follows:
|
|
For the Year Ended April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
Total # of
|
|
|
Average
|
|
|
Total # of
|
|
|
Average
|
|
|
Total # of
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
Restricted
|
|
|
Grant
Date
|
|
|
|
Stock Units
|
|
|
Fair Value
|
|
|
Stock Units
|
|
|
Fair Value
|
|
|
Stock Units
|
|
|
Fair Value
|
|
RSUs and PSUs outstanding, beginning of
period
|
|
|
1,428,848
|
|
|
$
|
18.58
|
|
|
|
1,215,753
|
|
|
$
|
15.38
|
|
|
|
1,190,879
|
|
|
$
|
12.45
|
|
Awarded
|
|
|
561,890
|
|
|
|
15.09
|
|
|
|
666,509
|
|
|
|
19.85
|
|
|
|
541,077
|
|
|
|
17.72
|
|
Vested
|
|
|
(300,496
|
)
|
|
|
16.53
|
|
|
|
(433,966
|
)
|
|
|
11.64
|
|
|
|
(430,768
|
)
|
|
|
10.57
|
|
Forfeited
|
|
|
(247,925
|
)
|
|
|
17.04
|
|
|
|
(19,448
|
)
|
|
|
17.19
|
|
|
|
(85,435
|
)
|
|
|
10.94
|
|
RSUs and PSUs outstanding, end of
period
|
|
|
1,442,317
|
|
|
$
|
17.80
|
|
|
|
1,428,848
|
|
|
$
|
18.58
|
|
|
|
1,215,753
|
|
|
$
|
15.38
|
|
As of April 30, 2018, there was $9.6 million of unrecognized compensation cost related to unvested RSUs and PSUs. This cost is expected to be recognized over a weighted average remaining contractual term of 1.8 years.
On September 26, 2011, our stockholders approved our 2011 ESPP, which authorizes the sale of up to 6,000,000 shares of our common stock to employees. All options and rights to participate in our ESPP are nontransferable and subject to forfeiture in accordance with our ESPP guidelines. Our current ESPP will be implemented in a series of successive offering periods, each with a maximum duration of 12 months. If the fair market value, or FMV, per share of our common stock on any purchase date is less than the FMV per share on the start date of a 12-month offering period, then that offering period will automatically terminate, and a new 12-month offering period will begin on the next business day. Each offering period will begin on April 1 or October 1, as applicable, immediately following the end of the previous offering period. Payroll deductions will be on an after-tax basis, in an amount of not less than 1% and not more than 20% (or such greater percentage as the committee appointed to administer our ESPP may establish from time to time before the first day of an offering period) of a participant’s compensation on each payroll date. The option exercise price per share will equal 85% of the lower of the FMV on the first day of the offering period or the FMV on the exercise date. The maximum number of shares that a participant may purchase during any purchase period is 12,500 shares, or a total of $25,000 in shares, based on the FMV on the first day of the offering period. Our ESPP will remain in effect until the earliest of (a) the exercise date that participants become entitled to purchase a number of shares greater than the number of reserved shares available for purchase under our ESPP, (b) such date as is determined by our board of directors in its discretion, or (c) March 31, 2022. In the event of certain corporate transactions, each option outstanding under our ESPP will be assumed or an equivalent option will be substituted by the successor corporation or a parent or subsidiary of such successor corporation. During fiscal 2018, 2017, and 2016, 203,002, 144,102, and 157,674 shares, respectively, were purchased by our employees under our ESPP.
F-28
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
We measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. We calculate the fair value of our stock
options issued to employees using the Black-Scholes model at the time the options were granted. That amount is then amortized over the vesting period of the option. With our ESPP, fair value is determined at the beginning of the purchase period and amortiz
ed over the term of each exercise period.
The following assumptions were used in valuing our ESPP purchases during the years ended April 30, 2018, 2017, and 2016:
|
For the Years Ended April 30,
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Risk-free interest rate
|
|
1.62
|
%
|
|
|
0.60
|
%
|
|
|
0.19
|
%
|
Expected term
|
6 months
|
|
|
6 months
|
|
|
6 months
|
|
Expected volatility
|
|
42.3
|
%
|
|
|
45.3
|
%
|
|
|
40.9
|
%
|
Dividend yield
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
We estimate expected volatility using historical volatility for the expected term. The fair value of each stock option or ESPP purchase was estimated on the date of the grant using the Black-Scholes option pricing model (using the risk-free interest rate, expected term, expected volatility, and dividend yield variables, as noted in the above table). The total stock-based compensation expense, including stock options, purchases under our ESPP, and RSU and PSU awards, was $7.8 million, $8.6 million, and $6.5 million, for fiscal years 2018, 2017, and 2016, respectively.
15. Employer Sponsored Benefit Plans
Contributory Defined Investment Plan
— We offer two contributory defined investment plans covering substantially all employees, subject to service requirements. Employees may contribute up to 100% of their annual pay, depending on the plan. We generally make discretionary matching contributions of up to 50% of the first 6% of employee contributions to the plan. We contributed $3.0 million, $2.7 million, and $2.4 million for the fiscal years ended April 30, 2018, 2017, and 2016, respectively.
Non-Contributory Profit Sharing Plan
— We have a non-contributory profit sharing plan covering substantially all of our employees. Employees become eligible on May 1 following the completion of a full fiscal year of continuous service. Our contributions to the plan are discretionary. For fiscal 2018, we plan to contribute approximately $1.3 million, which has been recorded in general and administrative costs. We contributed $13.0 million and $11.5 million for the fiscal years ended April 30, 2017 and 2016, respectively. Contributions are funded after the fiscal year-end.
16. Income Taxes
Income tax (benefit)/expense from continuing operations consists of the following (in thousands):
|
For the Year Ended April 30,
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
|
5,081
|
|
|
$
|
|
61,943
|
|
|
$
|
|
48,961
|
|
State
|
|
|
1,184
|
|
|
|
|
9,349
|
|
|
|
|
6,622
|
|
Total current
|
|
|
6,265
|
|
|
|
|
71,292
|
|
|
|
|
55,583
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal
|
|
|
(9,081
|
)
|
|
|
|
(6,969
|
)
|
|
|
|
(4,187
|
)
|
Deferred state
|
|
|
305
|
|
|
|
|
(871
|
)
|
|
|
|
(261
|
)
|
Total deferred
|
|
|
(8,776
|
)
|
|
|
|
(7,840
|
)
|
|
|
|
(4,448
|
)
|
Total income tax (benefit)/expense
|
$
|
|
(2,511
|
)
|
|
$
|
|
63,452
|
|
|
$
|
|
51,135
|
|
F-29
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The following table presents a reconciliation of the provision for income taxes from continuing operations at statutory rates to the provision (benefit) in the consolidated financial statements (in thous
ands):
|
For the Year Ended April 30,
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Federal income taxes expected at the statutory rate (a)
|
$
|
|
5,355
|
|
|
$
|
|
66,957
|
|
|
$
|
|
50,783
|
|
State income taxes, less federal income tax benefit
|
|
|
1,460
|
|
|
|
|
5,310
|
|
|
|
|
4,349
|
|
Stock compensation
|
|
|
(322
|
)
|
|
|
|
(3,092
|
)
|
|
|
|
108
|
|
Business meals and entertainment
|
|
|
302
|
|
|
|
|
296
|
|
|
|
|
233
|
|
Domestic production activity deduction
|
|
|
(335
|
)
|
|
|
|
(5,728
|
)
|
|
|
|
(4,414
|
)
|
Research and development tax credit
|
|
|
(426
|
)
|
|
|
|
(453
|
)
|
|
|
|
(215
|
)
|
Change in uncertain tax positions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(91
|
)
|
Other
|
|
|
(403
|
)
|
|
|
|
162
|
|
|
|
|
382
|
|
Federal tax rate change on deferred taxes
|
|
|
(8,142
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Total income tax (benefit)/expense
|
$
|
|
(2,511
|
)
|
|
$
|
|
63,452
|
|
|
$
|
|
51,135
|
|
(a)
|
We had a blended statutory rate of 30.4% in fiscal 2018 because of Tax Reform and a statutory rate of 35% in fiscal 2017 and 2016, respectively.
|
Deferred tax assets (liabilities) related to temporary differences are the following (in thousands):
|
|
For the Years Ended April 30,
|
|
|
|
2018
|
|
|
2017
|
|
Non-current tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards and tax credits
|
|
$
|
3,372
|
|
|
$
|
2,902
|
|
Inventories
|
|
|
6,204
|
|
|
|
9,325
|
|
Accrued expenses, including compensation
|
|
|
3,037
|
|
|
|
8,194
|
|
Environmental reserves
|
|
|
258
|
|
|
|
279
|
|
Product liability
|
|
|
353
|
|
|
|
515
|
|
Accrued promotions
|
|
|
1,061
|
|
|
|
4,193
|
|
Workers' compensation
|
|
|
485
|
|
|
|
796
|
|
Warranty reserve
|
|
|
1,843
|
|
|
|
2,114
|
|
Stock-based compensation
|
|
|
3,576
|
|
|
|
4,734
|
|
State bonus depreciation
|
|
|
1,117
|
|
|
|
1,049
|
|
Property taxes
|
|
|
(160
|
)
|
|
|
(189
|
)
|
Property, plant, and equipment
|
|
|
(18,434
|
)
|
|
|
(30,017
|
)
|
Intangible assets
|
|
|
(12,510
|
)
|
|
|
(27,032
|
)
|
Pension
|
|
|
218
|
|
|
|
179
|
|
Other
|
|
|
21
|
|
|
|
130
|
|
Less valuation allowance
|
|
|
(3,336
|
)
|
|
|
(2,792
|
)
|
Net deferred tax asset/(liability) — total
|
|
$
|
(12,895
|
)
|
|
$
|
(25,620
|
)
|
We had federal net operating loss carryforwards amounting to $216,000 as of April 30, 2018, which expire in fiscal 2020. We obtained $8.2 million in additional loss carryforwards through our acquisition of SWSS on July 20, 2009, the majority of which was utilized in fiscal 2010. Utilization of the remaining losses is limited by Section 382 of the Internal Revenue Code to $108,000 in fiscal 2018 and for each taxable year thereafter. It is possible that future substantial changes in our ownership could occur that could result in additional ownership changes pursuant to Section 382 of the Internal Revenue Code. If such an ownership change were to occur, there could be an annual limitation on the remaining tax loss carryforward.
There were $17.9 million and $17.1 million in state net operating loss carryforwards as of April 30, 2018 and 2017, respectively. The state net operating loss carryforwards will expire between April 30, 2025 and April 30, 2037. There were $3.1 million and $3.2 million of state tax credit carryforwards as of April 30, 2018 and 2017, respectively. The state tax credit carryforwards will expire between April 30, 2020 and April 30, 2026 or have no expiration date.
F-30
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
As of April 30, 2018, valuation allowances of $921,000 and $2.4 mi
llion were provided on our deferred tax assets for those state net operating loss carryforwards, and state tax credits, respectively, that we do not anticipate using prior to their expiration. As of April 30, 2017, valuation allowances of $720,000 and $2.1
million were provided on our deferred tax assets for those state net operating loss carryforwards and state tax credits, respectively, that we do not anticipate using prior to their expiration. The increase in the valuation allowance on our deferred tax a
ssets for state net operating losses and credits and other state deferred tax assets related mainly to Massachusetts Investment Tax Credits. No valuation allowances were provided on our deferred federal income tax assets as of April 30, 2018 or 2017, as we
believe that it is more likely than not that all such assets will be realized. Recording a valuation allowance or reversing a valuation allowance could have an effect on our future results of operations and financial position.
On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation with Tax Reform, which makes broad and complex changes to the U.S. tax code. Tax Reform significantly revises the corporate federal income tax by, among other things, lowering the corporate federal income tax rate, limiting various deductions, and repealing the domestic manufacturing deduction. We expect to see net benefits from the lower federal tax rate, although there are offsetting effects from other components of Tax Reform.
Tax Reform reduced the U.S. federal statutory income tax rate from 35% to 21% generally effective for tax years beginning on or after January 1, 2018. However, companies with fiscal years that include January 1, 2018 must use a blended rate. Our U.S. federal statutory tax rate will be 21.0% starting in fiscal 2019.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118, or SAB118, that provides additional guidance allowing companies to use a measurement period, similar to that used in business combinations, to account for the impacts of Tax Reform in their financial statements. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the Tax Reform is incomplete, but the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. We have accounted for the impacts of Tax Reform to the extent a reasonable estimate could be made during the fiscal year ended April 30, 2018. We will continue to refine our estimates throughout the measurement period or until the accounting is complete.
We estimate the impact of Tax Reform, based on currently available information and interpretations of the law, to be a benefit of $8.7 million. The tax benefit is due to remeasurement of deferred tax assets and liabilities at lower enacted corporate federal tax rates, which did not have a cash impact in fiscal 2018. The actual impact of Tax Reform may differ from this estimate, possibly materially, because of, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and actions we may take as a result of Tax Reform.
The income tax provisions (benefit) represent effective tax rates of (14.3%) and 33.2% for the fiscal year ended April 30, 2018 and 2017, respectively. The tax benefit in fiscal 2018 was primarily caused by the effect of Tax Reform which resulted in the remeasurement of deferred tax assets and liabilities, as well as lower operating profit. Excluding the impact of Tax Reform and other discrete items, our effective tax rate for the fiscal year ended April 30, 2018 was 35.4%.
At April 30, 2018 and 2017, we did not have any gross tax-effected unrecognized tax benefits.
With limited exception, we are subject to U.S. federal, state, and local, or non-U.S. income tax audits by tax authorities for fiscal years subsequent to April 30, 2014.
F-31
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
17. Commitments and Contingencies
Litigation
We are a defendant in five product liability cases and are aware of 10 other product liability claims, primarily alleging defective product design, defective manufacturing, or failure to provide adequate warnings. In addition, we are a co-defendant in a case filed on August 27, 1999 by the city of Gary, Indiana against numerous firearm manufacturers, distributors, and dealers seeking to recover damages allegedly arising out of the misuse of firearms by third parties. On May 23, 2018, we were named in an action related to the Parkland, Florida shooting, filed in the Circuit Court, Broward County, Florida, seeking a declaratory judgment that a Florida statute that provides firearm manufacturers and dealers immunity from liability when their legally manufactured and lawfully sold firearms are later used in criminal acts only applies to civil actions commenced by governmental agencies not private litigants.
We believe that the various allegations as described above are unfounded, and, in addition, that any accident and any results from them or any injuries were due to negligence or misuse of the firearm by the claimant or a third party.
In addition, we are involved in lawsuits, claims, investigations, and proceedings, including commercial, environmental, and employment matters, which arise in the ordinary course of business.
The relief sought in individual cases primarily includes compensatory and, sometimes, punitive damages. Certain of the cases and claims seek unspecified compensatory or punitive damages. In others, compensatory damages sought may range from less than $75,000 to approximately $350,000. In our experience, initial demands do not generally bear a reasonable relationship to the facts and circumstances of a particular matter. We believe that our accruals for product liability cases and claims, as described below, are a reasonable quantitative measure of the cost to us of product liability cases and claims.
We are vigorously defending ourselves in the lawsuits to which we are subject. An unfavorable outcome or prolonged litigation could harm our business. Litigation of this nature also is expensive and time consuming and diverts the time and attention of our management.
We monitor the status of known claims and the related product liability accrual, which includes amounts for defense costs for asserted and unasserted claims. After consultation with litigation counsel and the review of the merits of each claim, we have concluded that we are unable to reasonably estimate the probability or the estimated range of reasonably possible losses related to material adverse judgments related to such claims and, therefore, we have not accrued for any such judgments. In the future, should we determine that a loss (or an additional loss in excess of our accrual) is at least reasonably possible and material, we would then disclose an estimate of the possible loss or range of loss, if such estimate could be made, or disclose that an estimate could not be made. We believe that we have provided adequate accruals for defense costs.
For the fiscal years ended April 30, 2018, 2017, and 2016, we paid $473,000, $254,000, and $264,000, respectively, in defense and administrative costs relative to product liability and municipal litigation. In addition, we spent an aggregate of $129,000, $209,000, and $55,000, respectively, in those fiscal years in settlement fees related to product liability cases.
We have recorded our liability for defense costs before consideration for reimbursement from insurance carriers. We have also recorded the amount due as reimbursement under existing policies from the insurance carriers as a receivable shown in other current assets and other assets.
During the year ended April 30, 2016, we received a $1.8 million insurance recovery, which was recorded in general and administrative expenses, as a result of an insurance settlement agreement for partial reimbursement of defense costs we incurred in prior fiscal years related to our resolved government investigation.
We recognize gains and expenses for changes in our product liability provisions and municipal litigation liabilities. In fiscal 2018, we recorded expense of $540,000; in fiscal 2017, we recorded a gain of $364,000; and in fiscal 2016, we recorded expense of $299,000.
F-32
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
At this time, an estimated range of reasonably possible additional losses relating to unfavorable outcomes cannot be made.
Environmental Remediation
We are subject to numerous federal, state, and local laws and regulations that regulate the health and safety of our workforce, including, but not limited to, those regulations monitored by the Occupational Health and Safety Administration, or OSHA, the National Fire Protection Association, and the Department of Public Health. Though not exhaustive, examples of applicable regulations include confined space safety, walking and working surfaces, machine guarding, and life safety.
We are also subject to numerous federal, state and local environmental laws and regulations concerning, among other things, emissions in the air, discharges to land, surface, subsurface strata and water and the generation, handling, storage, transportation, treatment and disposal of hazardous wastes and other materials. These laws have required us to make significant expenditures of both a capital and expense nature. Several of the more significant federal laws applicable to our operations include the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act.
We have in place programs and personnel to monitor compliance with various federal, state, and local environmental regulations. In the normal course of our manufacturing operations, we are subject to governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges into the environment. We fund our environmental costs through cash flows from operations. We believe that we are in compliance with applicable environmental regulations in all material respects.
We are required to remediate hazardous waste at our facilities. Currently, we own a designated site in Springfield, Massachusetts that contains two release areas, which are the focus of remediation projects as part of the Massachusetts Contingency Plan, or MCP. The MCP provides a structured environment for the voluntary remediation of regulated releases. We may be required to remove hazardous waste or remediate the alleged effects of hazardous substances on the environment associated with past disposal practices at sites not owned by us. We have received notice that we are a potentially responsible party from the Environmental Protection Agency and/or individual states under CERCLA or a state equivalent at two sites.
As of April 30, 2018 and 2017, we recorded approximately $1.0 million and $730,000, respectively, of environmental reserve in non-current liabilities. We have calculated the net present value of the environmental reserve to be equal to the carrying value of the liability recorded on our books. Our estimate of these costs is based upon currently enacted laws and regulations, currently available facts, experience in remediation efforts, existing technology, and the ability of other potentially responsible parties or contractually liable parties to pay the allocated portions of any environmental obligations.
When the available information is sufficient to estimate the amount of liability, that estimate has been used. When the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. We may not have insurance coverage for our environmental remediation costs. We have not recognized any gains from probable recoveries or other gain contingencies. The environmental reserve was calculated using undiscounted amounts based on environmental remediation reports obtained from independent third-parties.
Based on information known to us, we do not expect current environmental regulations or environmental proceedings and claims to have a material adverse effect on our consolidated financial position, results of operations, or cash flows. However, it is not possible to predict with certainty the impact on us of future environmental compliance requirements or the cost of resolving of future environmental health and safety proceedings and claims, in part because the scope of the remedies that may be required is not certain, liability under federal environmental laws is joint and several in nature, and environmental laws and regulations are subject to modification and changes in interpretation. There can be no assurance that additional or changing environmental regulation will not become more burdensome in the future and that any such development would not have a material adverse effect on our company.
F-33
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Contracts
Employment Agreements
— We have employment, severance, and change of control agreements with certain officers and managers.
Other Agreements
— We have distribution agreements with various third parties in the ordinary course of business.
Leases
In fiscal 2017, we announced a plan to establish a national logistics facility in Boone County, Missouri. We ultimately plan to rely on this logistics facility for substantially all of our product distribution. In fiscal 2018, we broke ground on our new 633,000 square foot facility, which is currently scheduled to be completed and operational in fiscal 2019.
The building for our national logistics facility will be treated as a capital lease and will be recorded in construction in progress, offset by a capital lease payable throughout building construction and will have no impact on cash flow. The total cost of the building is estimated to be between $45.0 million and $50.0 million, of which we expect approximately $30.0 million to $35.0 million will be recorded as a right of use asset on our consolidated balance sheet when construction is complete. In addition, we expect to spend between $25.0 million and $30.0 million related to material handling equipment, information technology systems, and other capital projects in support of our national logistics facility.
As of April 30, 2018, we have recorded $22.0 million in construction in progress, which is included in property, plant, and equipment in our consolidated balance sheet, for costs incurred by the builder relating to the purchase of land and costs related to the design and construction of the building, offset by a $22.0 million capital lease payable which is included in other non-current liabilities in our consolidated balance sheet.
The following summarizes our operating leases for office and/or manufacturing space:
Location of Lease
|
|
Expiration Date
|
Bentonville, Arkansas
|
|
September 25, 2018
|
Jacksonville, Florida
|
|
December 31, 2018
|
Columbia. Missouri
|
|
February 28, 2019
|
Shenzen, China
|
|
February 28, 2019
|
Columbia, Missouri
|
|
April 30, 2019
|
Scottsdale, Arizona
|
|
April 30, 2021
|
Wilsonville, Oregon
|
|
October 31, 2022
|
Columbia, Missouri
|
|
April 30, 2023
|
Deep River, Connecticut
|
|
May 4, 2024
|
Meridian, Idaho
|
|
November 30, 2027
|
We also lease machinery, photocopiers, and vehicles for our national sales force with various expiration dates.
As of April 30, 2018, the operating lease commitments were as follows (in thousands):
For the Year Ended April 30,
|
|
Amount
|
|
2019
|
|
$
|
|
3,938
|
|
2020
|
|
|
|
2,864
|
|
2021
|
|
|
|
2,734
|
|
2022
|
|
|
|
2,409
|
|
2023
|
|
|
|
2,189
|
|
Thereafter
|
|
|
|
2,149
|
|
|
|
$
|
|
16,283
|
|
Rent expense in the fiscal years ended April 30, 2018, 2017, and 2016 was $5.2 million, $4.4 million, and $4.1 million, respectively.
F-34
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
18. Quarterly Financial Information (Unaudited)
The following table summarizes quarterly financial results in fiscal 2018 and 2017. In our opinion, all adjustments necessary to present fairly the information for such quarters have been reflected (in thousands, except per share data):
|
|
For the Year Ended April 30, 2018
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
Net sales
|
$
|
|
129,021
|
|
|
$
|
|
148,427
|
|
|
$
|
|
157,376
|
|
|
$
|
|
172,026
|
|
|
$
|
|
606,850
|
|
Gross profit
|
|
|
40,632
|
|
|
|
|
50,799
|
|
|
|
|
46,917
|
|
|
|
|
57,404
|
|
|
|
|
195,752
|
|
Net (loss)/income
|
$
|
|
(2,165
|
)
|
|
$
|
|
3,234
|
|
|
$
|
|
11,395
|
|
(c)
|
$
|
|
7,664
|
|
|
$
|
|
20,128
|
|
Per common share (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - total
|
$
|
|
(0.04
|
)
|
|
$
|
|
0.06
|
|
|
$
|
|
0.21
|
|
|
$
|
|
0.14
|
|
|
$
|
|
0.37
|
|
Diluted - total
|
$
|
|
(0.04
|
)
|
|
$
|
|
0.06
|
|
|
$
|
|
0.21
|
|
|
$
|
|
0.14
|
|
|
$
|
|
0.37
|
|
|
For the Year Ended April 30, 2017
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
Net sales
|
$
|
|
206,951
|
|
|
$
|
|
233,528
|
|
|
$
|
|
233,523
|
|
|
$
|
|
229,186
|
|
|
$
|
|
903,188
|
|
Gross profit
|
|
|
87,569
|
|
|
|
|
97,605
|
|
|
|
|
99,311
|
|
|
|
|
90,787
|
|
|
|
|
375,272
|
|
Net income
|
$
|
|
35,222
|
|
(b)
|
$
|
|
32,483
|
|
|
$
|
|
32,453
|
|
|
$
|
|
27,696
|
|
|
$
|
|
127,854
|
|
Per common share (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - total
|
$
|
|
0.63
|
|
(b)
|
$
|
|
0.58
|
|
|
$
|
|
0.58
|
|
|
$
|
|
0.50
|
|
|
$
|
|
2.29
|
|
Diluted - total
|
$
|
|
0.62
|
|
(b)
|
$
|
|
0.57
|
|
|
$
|
|
0.57
|
|
|
$
|
|
0.50
|
|
|
$
|
|
2.25
|
|
(a)
|
Basic and diluted earnings per share may not equal the sum of the quarterly basic and diluted earnings per share due to rounding.
|
(b)
|
Our first quarter results for fiscal 2017 were restated as a result of adopting ASU 2016-09,
Compensation – Stock Compensation,
during the second quarter of fiscal 2017. As a result of this adoption, net income increased $2.6 million and net income per basic and diluted share increased $0.05 for the three months ended July 31, 2016.
|
(c)
|
Amount includes an income tax benefit of approximately $9.4 million, primarily caused by the effect of Tax Reform, which resulted in the remeasurement of deferred tax assets and liabilities at lower enacted corporate federal tax rates.
|
F-35
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
19. Segment Reporting
We report our results of operations in two segments: (1) Firearms (which includes Firearms and Manufacturing Services divisions)
and (2) Outdoor Products & Accessories (which includes Outdoor Products & Accessories and Electro-Optics divisions). Our two segments are defined based on the reporting and review process used by the chief operating decision maker, our Chief Executive Officer. The Firearms segment has been determined to be a single operating segment and reporting segment based on our reliance on production metrics such as gross margin per unit produced, units produced per day, incoming orders per day, and revenue produced by trade channel, all of which are particular to the Firearms segment. The Outdoor Products & Accessories segment represents two operating segments that have been aggregated into a reportable segment, which are evaluated by a measurement of incoming orders per day and sales and gross margin by customer and brand.
The Firearms segment includes our firearms, services, and other components, which we manufacture or provide at our facilities in Springfield, Massachusetts, Houlton, Maine, Meridian, Idaho, and Deep River, Connecticut and our firearm products, which we develop, assemble, and market in our Springfield, Massachusetts facility. The Outdoor Products
& Accessories
segment includes our accessories products, which we develop, source, market, and distribute at our facilities in Columbia, Missouri and Jacksonville, Florida and our electro-optics products, which we develop, market, and assemble in our Wilsonville, Oregon facility. We report operating costs based on the activities performed within each segment.
Segment assets are those directly used in or clearly allocable to a reportable segment’s operations. Assets by business segment are presented in the following table as of April 30, 2018 and 2017 (in thousands):
|
|
As of April 30, 2018
|
|
|
As of April 30, 2017
|
|
|
|
Firearms
|
|
|
Outdoor
Products
&
Accessories
|
|
|
Total
|
|
|
Firearms
|
|
|
Outdoor
Products &
Accessories
|
|
|
Total
|
|
Total assets
|
|
$
|
346,517
|
|
|
$
|
398,543
|
|
|
$
|
745,060
|
|
|
$
|
393,341
|
|
|
$
|
394,695
|
|
|
$
|
788,036
|
|
Property, plant, and equipment, net
|
|
|
146,154
|
|
|
|
12,971
|
|
|
|
159,125
|
|
|
|
135,985
|
|
|
|
13,700
|
|
|
|
149,685
|
|
Intangibles, net
|
|
|
4,944
|
|
|
|
107,816
|
|
|
|
112,760
|
|
|
|
2,792
|
|
|
|
138,525
|
|
|
|
141,317
|
|
Goodwill
|
|
|
18,490
|
|
|
|
172,797
|
|
|
|
191,287
|
|
|
|
13,770
|
|
|
|
155,247
|
|
|
|
169,017
|
|
Results by business segment are presented in the following table for the years ended April 30, 2018, 2017, and 2016 (in thousands):
|
|
For the Year Ended April 30, 2018 (a)
|
|
|
|
Firearms
|
|
|
Outdoor
Products &
Accessories
|
|
|
Corporate
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
448,986
|
|
|
$
|
157,864
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
606,850
|
|
Intersegment revenue
|
|
|
3,807
|
|
|
|
13,816
|
|
|
|
—
|
|
|
|
(17,623
|
)
|
|
|
—
|
|
Total net sales
|
|
|
452,793
|
|
|
|
171,680
|
|
|
|
—
|
|
|
|
(17,623
|
)
|
|
|
606,850
|
|
Cost of sales
|
|
|
332,889
|
|
(b)
|
|
93,822
|
|
|
|
—
|
|
|
|
(15,613
|
)
|
|
|
411,098
|
|
Gross margin
|
|
|
119,903
|
|
|
|
77,859
|
|
|
|
—
|
|
|
|
(2,010
|
)
|
|
|
195,752
|
|
Operating income/(loss)
|
|
|
30,213
|
|
|
|
(5,508
|
)
|
(c)
|
|
(44,128
|
)
|
|
|
46,471
|
|
|
|
27,048
|
|
Income tax expense/(benefit) (d)
|
|
|
16,729
|
|
|
|
(8,059
|
)
|
|
|
(11,181
|
)
|
|
|
—
|
|
|
|
(2,511
|
)
|
F-36
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
|
|
For the Year Ended April 30, 2017 (a)
|
|
|
|
Firearms
|
|
|
Outdoor
Products &
Accessories
|
|
|
Corporate
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
772,997
|
|
|
$
|
130,191
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
903,188
|
|
Intersegment revenue
|
|
|
3,643
|
|
|
|
10,530
|
|
|
|
—
|
|
|
|
(14,173
|
)
|
|
|
—
|
|
Total net sales
|
|
|
776,640
|
|
|
|
140,721
|
|
|
|
—
|
|
|
|
(14,173
|
)
|
|
|
903,188
|
|
Cost of sales
|
|
|
464,019
|
|
|
|
75,737
|
|
(e)
|
|
—
|
|
|
|
(11,840
|
)
|
|
|
527,916
|
|
Gross margin
|
|
|
312,619
|
|
|
|
64,985
|
|
|
|
—
|
|
|
|
(2,332
|
)
|
|
|
375,272
|
|
Operating income/(loss)
|
|
|
201,442
|
|
|
|
(3,949
|
)
|
(f)
|
|
(47,787
|
)
|
|
|
50,233
|
|
|
|
199,939
|
|
Income tax expense/(benefit)
|
|
|
77,585
|
|
|
|
(2,300
|
)
|
|
|
(11,833
|
)
|
|
|
—
|
|
|
|
63,452
|
|
|
|
For the Year Ended April 30, 2016 (a)
|
|
|
|
Firearms
|
|
|
Outdoor
Products &
Accessories
|
|
|
Corporate
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
652,065
|
|
(g)
|
$
|
70,843
|
|
(g)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
722,908
|
|
Intersegment revenue
|
|
|
1,821
|
|
|
|
743
|
|
|
|
—
|
|
|
|
(2,564
|
)
|
|
|
—
|
|
Total net sales
|
|
|
653,886
|
|
|
|
71,586
|
|
|
|
—
|
|
|
|
(2,564
|
)
|
|
|
722,908
|
|
Cost of sales
|
|
|
394,118
|
|
(g)
|
|
37,536
|
|
(g)
|
|
—
|
|
|
|
(2,558
|
)
|
|
|
429,096
|
|
Gross margin
|
|
|
259,767
|
|
|
|
34,051
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
293,812
|
|
Operating income/(loss)
|
|
|
153,728
|
|
|
|
3,511
|
|
|
|
(17,201
|
)
|
|
|
18,605
|
|
|
|
158,643
|
|
Income tax expense/(benefit)
|
|
|
58,103
|
|
|
|
1,006
|
|
|
|
(7,974
|
)
|
|
|
—
|
|
|
|
51,135
|
|
(a)
|
For the years ended April 30, 2018, 2017, and 2016, we allocated all of corporate overhead expenses except for interest and income taxes,
such as general and administrative expenses and other corporate-level expenses, to both our Firearms and Outdoor Products & Accessories segments.
|
(b)
|
Amount includes $500,000 of additional cost of goods sold from the fair value inventory step-up related to our 2018 Acquisitions.
|
(c)
|
Amount includes $20.8 million of amortization of intangible assets identified as a result of our acquisitions.
|
(d)
|
Amounts include an income tax benefit of approximately $8.7 million, primarily caused by the effect of Tax Reform, which resulted in the remeasurement of deferred tax assets and liabilities at lower enacted corporate federal tax rates.
|
(e)
|
Amount includes $4.7 million of additional cost of goods sold from the fair value inventory step-up and backlog expense related to the 2017 Acquisitions.
|
(f)
|
Amount includes $18.4 million of amortization of intangible assets identified as a result of our acquisitions.
|
(g)
|
Effective October 1, 2015, our Thompson/Center accessories business was transitioned from our Firearms segment to our Outdoor Products & Accessories segment. As a result of the transition, we have reclassified $5.6 million and $4.6 million of revenue and cost of sales, respectively, from the Firearms segment to the Outdoor Products & Accessories segment for the year ended April 30, 2016.
|
F-37