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, 2019 and 2018, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended April 30, 2019, and the related notes and the schedule listed in the Index 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2019, 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, 2019, 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./s/
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 January 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 and (2) Outdoor Products & Accessories.
In our Firearms segment, we manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and muzzleloaders), handcuffs, suppressors, and other firearm-related products for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We sell our firearm products under the Smith & Wesson, M&P, Performance Center, Thompson/Center Arms, and Gemtech brands. We manufacture our firearm products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We also sell our manufacturing services to other businesses to level-load our factories. We sell those services under our Smith & Wesson and Smith & Wesson Precision Components brands.
In our Outdoor Products & Accessories segment, we design, source, distribute, and manufacture reloading, gunsmithing, and gun cleaning supplies; high-quality stainless-steel cutting tools and accessories; flashlights, tree saws and related trimming accessories; shooting supplies, rests, and other related accessories; apparel; vault accessories; laser grips and laser sights; and a full rang
e of products for survival and emergency preparedness. We sell our products under the Caldwell, Crimson Trace,
Wheeler, Tipton, Frankford Arsenal, Schrade, Imperial, Uncle Henry, BUBBA, UST, Lockdown, Hooyman, BOG, Old Timer, LaserLyte, and KeyGear brands
.
We also offer firearms and non-firearms accessories, such as flashlights and knives, under our brands in our firearms business, including Smith & Wesson, M&P, Performance Center, and Thompson/Center Arms.
We develop and market our outdoor products and accessories at our facilities in Columbia, Missouri; 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.
In January 2019, we acquired substantially all of the LaserLyte branded products and other assets, from P&L Industries Inc, which we refer to as the LaserLyte Acquisition. See Note 2 –
Acquisitions
below for more information regarding this transaction.
The 2017 Acquisitions, the 2018 Acquisitions, and the LaserLyte Acquisition 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
. Acquisiti
ons
LaserLyte Acquisition
In January 2019, we acquired substantially all of the LaserLyte branded products and other assets from P&L Industries, Inc., for a purchase price of $2.0 million, subject to certain adjustments, utilizing cash on hand. P&L Industries was a provider of laser training and sighting products for the consumer market. The operations of LaserLyte were fully integrated into our facility located in Wilsonville, Oregon and reported in our Outdoor Products & Accessories segment. This acquisition did not have a material impact on our condensed consolidated financial statements for all periods presented. Included in general and administrative costs are $28,000 of acquisition-related costs incurred for the LaserLyte Acquisition during the year ended April 30, 2019.
Pro forma results of operations assuming that the LaserLyte Acquisitions had occurred as of May 1, 2017 are not required because of the immaterial impact on our consolidated financial statements for all periods presented.
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, 2019, 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 valuations of the assets acquired and liabilities assumed in the 2018 Acquisitions are complete. During the three months ended October 31, 2018, we increased goodwill by $618,000 due to inventory valuation adjustments.
The following table summarizes the 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
|
|
|
|
(86
|
)
|
|
$
|
760
|
|
Inventories
|
|
|
4,683
|
|
|
|
(601
|
)
|
|
|
4,082
|
|
Other current assets
|
|
|
145
|
|
|
|
(56
|
)
|
|
|
89
|
|
Property, plant, and equipment
|
|
|
506
|
|
|
|
13
|
|
|
|
519
|
|
Intangibles
|
|
|
6,400
|
|
|
|
—
|
|
|
|
6,400
|
|
Goodwill
|
|
|
11,846
|
|
|
|
708
|
|
|
|
12,554
|
|
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 identifiable intangible assets acquired (in thousands) in the 2018 Acquisitions and their respective weighted avera
ge 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 might have been 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 forecasted revenue, during fiscal 2018, we recorded a $1.6 million reduction in the fair value of this contingent consideration liability because we did not expect that the acquired business would achieve the performance metrics. During the three months ended January 31, 2019, we recorded a $60,000 reduction in the remaining fair value of this contingent liability because we confirmed the performance metrics were not achieved. These reductions were recorded in other income on the condensed consolidated statements of income.
The following table summarizes the 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
|
|
F-10
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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
|
|
|
|
|
Ended
|
|
|
|
|
April 30, 2017
|
|
Net sales
|
|
|
$
|
934,247
|
|
Income from operations
|
|
|
|
195,295
|
|
Net income per share - diluted
|
|
|
|
2.30
|
|
The unaudited pro forma income from operations for the years ended April 30, 2017 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 pro 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 periods.
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, UST, and AOB Consulting (Shenzhen), Co., LTD., 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, 2019 and 2018 and for the periods presented, have been included. All intercompany accounts and transactions have been eliminated in consolidation.
F-11
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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, 2019, 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, 2019. The carrying value of the 2020 Senior Notes as of April 30, 2019 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 6 –
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.
For the fiscal year ended April 30, 2019, none of our customers exceeded 10% of our net sales and one of our customers accounted for approximately 19.8% of our accounts receivable. For the fiscal year ended April 30, 2018, one of our customers accounted for 11.9% of our net sales and none of our customers accounted for 10% or more of our accounts receivable. For the fiscal year ended April 30, 2017, none of our customers exceeded 10% of our net sales and one of our customers accounted for approximately 17.5% of our 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.
F-12
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Intangible Assets
—
We record intangible assets at cost or based on the fair value of the assets acquired. Intan
gible 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 in accordance with the provisions of Accounting Standards Update, or ASU,
Revenue from Contracts with Customers (Topic 606)
, which became effective for us on May 1, 2018. Generally, all performance obligations are satisfied and revenue is recognized when the risks and rewards of ownership have transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance.
In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs under which customers are entitled to receive free goods based upon their purchase of our products. The fulfillment of these free goods are our responsibility. In such instances, we allocate the revenue of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the products included in the promotional program, including the free goods. Revenue is recognized proportionally as each performance obligation is satisfied, based on the relative transaction price of each product. The net change in contract liabilities for a given period is reported as an increase or decrease to sales.
Our product sales are generally sold free on board, or FOB, shipping point and provide payment terms to most commercial customers ranging from 20 to 90 days of product shipment with a discount available to some customers for early payment. For contracts with discounted terms, the transaction price is determined upon establishment of the contract that contains the final terms of the sale, including the description, quantity, and price of each product purchased. We estimate variable consideration relative to the amount of cash discounts to which customers are likely to be entitled. In some instances, we provide longer payment terms, particularly as it relates to our hunting dating programs, which represent payment terms due in the fall for certain orders of hunting products received in the spring and summer. We do not consider these extended terms to be a significant financing component of the contract because the payment terms are less than one year. In all cases, we consider our costs related to shipping and handling to be a cost of fulfilling the contract with the customer.
Segment Information
—
We have two reporting segments: Firearms, which includes our Firearms and Manufacturing Services divisions; and Outdoor Products & Accessories. 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.
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.
F-13
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The following table provides a reconciliation of the net income amounts and weighted average number of common and common equivalent shares used to determine basi
c and diluted earnings per common share (in thousands, except per share data):
|
For the Year Ended April 30,
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
Basic earnings
|
$
|
|
18,410
|
|
|
|
54,483
|
|
|
$
|
|
0.34
|
|
|
$
|
|
20,128
|
|
|
|
54,061
|
|
|
$
|
|
0.37
|
|
|
$
|
|
127,854
|
|
|
|
55,930
|
|
|
$
|
|
2.29
|
|
Effect of dilutive stock awards
|
|
—
|
|
|
|
733
|
|
|
|
|
(0.01
|
)
|
|
|
—
|
|
|
|
773
|
|
|
|
—
|
|
|
|
—
|
|
|
|
961
|
|
|
|
|
(0.04
|
)
|
Diluted earnings
|
$
|
|
18,410
|
|
|
|
55,216
|
|
|
$
|
|
0.33
|
|
|
$
|
|
20,128
|
|
|
|
54,834
|
|
|
$
|
|
0.37
|
|
|
$
|
|
127,854
|
|
|
|
56,891
|
|
|
$
|
|
2.25
|
|
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, 2019, 2018, and 2017.
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.
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 impairment is present. We have reviewed the provisions of ASC 350-20, with respect to the criteria necessary to evaluate the number of reporting units that exist. In prior years, we have concluded that we had three operating units when reviewing ASC 350-20: Firearms, Outdoor Products & Accessories, and Electro-Optics. However, a combination of factors occurring in the firearms industry during the last few years, including changes in the political environment and reduced overall demand for both firearms and the accessories that are attached to firearms, such as laser sights, has resulted in us lowering our long-range sales volume, operating profit, and cash flow forecasts in our Electro-Optics operating unit. Based on those forecasts, we felt it important to seek out efficiencies in that operating unit to increase operating performance and as a result decided to combine our Electro-Optics operating units with our Outdoor Products & Accessories operating unit. The lowered forecasts and the decision to reorganize those operating units caused us to evaluate the fair value of our operating units utilizing those forecasts. Because of that evaluation, we recorded a $10.4 million impairment of goodwill in our Electro-Optics operating unit during the three months ended
F-14
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
January 31, 2019. This impairment
was recorded in our Outdoor Products & Accessories reporting segment.
No material impairment charges were recorded in fiscal 2018 or 2017 based on our review of our long-lived tangible and intangible assets.
B
ased on our review of ASC 350-20 s
ubsequent to the reorganization of Electro-Optics into Outdoor Products & Accessories,
we have determined that we now have two operating units: Firearms and Outdoor Products & Accessories.
We estimate the fair value of our Firearms and Outdoor Products & Accessories 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.
As of our valuation date, our Firearms operating unit had $19.0 million of goodwill and its fair value significantly exceeded its carrying value. Our Outdoor Products & Accessories operating unit had $163.2 million of goodwill and its fair value significantly exceeded its carrying value. Although we concluded that there was no additional impairment of the goodwill associated with our operating units as of April 30, 2019, 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.
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.
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.
F-15
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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 r
ifles 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 “saf
ety 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 faile
d 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 $
2.4
millio
n, which is recorded
in
accrued warranty
on our consolidated
balance
sheet
.
Warranty expense for the fiscal years ended April 30, 2019, 2018, and 2017 amounted to $2.9 million, $5.8 million, and $1.3 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, 2019, 2018, and 2017 (in thousands):
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
|
|
Warranties issued and adjustments to provisions
|
|
|
2,852
|
|
Warranty claims
|
|
|
(4,163
|
)
|
Balance as of April 30, 2019
|
$
|
|
6,202
|
|
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 $39.2 million, $58.2 million, and $37.3 million for the fiscal years ended April 30, 2019, 2018, and 2017, respectively. We have a co-op advertising program at the retail level. We expensed costs amounting to $23.8 million, $23.3 million, and $21.3 million for fiscal 2019, 2018, and 2017, 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.
Recently Issued Accounting Standards
—
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 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 revenue 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. We adopted the new standard on May 1, 2018 utilizing the modified retrospective approach. See Note 4 –
Revenue Recognition and Contracts with Customers
below for more information.
F-16
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
or ASU 2016-02,
which amends the existing guidance to require lessees to recognize right-of-use assets and lease liabilities in a classified balance sheet (with the exception of leases with a term equal to or less than 12 months). The most prominent among the changes in the standard is the requirement for lessees to recognize right-of-use assets and lease liabilities for those leases classified as operating leases under current U.S. GAAP. The requirements of this ASU are effective for financial statements for annual periods beginning after December 15, 2018, and early adoption is permitted. We will be implementing leasing software to assist us in the accounting and tracking of leases and plan to use the optional transition method allowed by ASU 2016-02. Under this method, the standard will be applied prospectively in the year of adoption. We will elect to use the package of practical expedients, which permits us to not reassess certain lease contract provisions. We expect the effect of ASU 2016-02 will result in the recognition of right-of-use assets of $11.5 million, the recognition of lease liabilities of $12.8 million, and the elimination of deferred rent and lease incentive liabilities of $1.3 million, primarily relating to our real estate operating leases, with no impact to retained earnings. We will adopt ASU 2016-02 in our first quarter of fiscal 2020.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The new standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The requirements of this ASU are effective for financial statements for annual periods beginning after December 15, 2019, and early adoption is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements, which we do not expect to be material.
4. Revenue Recognition and Contracts with Customers:
On May 1, 2018, we adopted ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, or ASU 2014-09, using the modified retrospective approach, and recorded a contract liability, included in accrued expenses in the condensed consolidated balance sheet, for outstanding performance obligations related to sales promotions. Under the modified retrospective approach, results for reporting periods after May 1, 2018 will be presented in accordance with ASU 2014-09, while prior period amounts will not be adjusted and will continue to be reported in accordance with the previous guidance, Accounting Standards Codification, or ASC, Topic 605,
Revenue Recognition
. When evaluating our performance obligations, we disaggregate revenue based on major product lines, which correlate with our reportable segments disclosed in Note 19 —
Segment Reporting.
Domestic sales account for 95% of our total net sales. There are no significant judgments or estimates used in the determination of performance obligations, and the transaction price for the performance obligations are allocated on a pro-rata basis. There are no other contract costs that need to be considered based on the nature of our performance obligations.
The following table outlines adjustments we recorded to our condensed consolidated balance sheet as a result of the adoption of ASU 2014-09 (in thousands):
|
|
Balance at
April 30, 2018
|
|
|
Accounting
Standard
Adjustments
|
|
|
Opening Balance
May 1, 2018
|
|
Accrued expenses and deferred revenue
|
|
$
|
41,632
|
|
|
$
|
(17,176
|
)
|
|
$
|
24,456
|
|
Deferred revenue from contracts with customers
|
|
—
|
|
|
|
23,305
|
|
|
|
23,305
|
|
Deferred income taxes
|
|
|
12,895
|
|
|
|
(1,519
|
)
|
|
|
11,376
|
|
Retained earnings
|
|
|
389,146
|
|
|
|
(4,610
|
)
|
|
|
384,536
|
|
At April 30, 2018, we had accrued $17.2 million of sales promotions, representing the cost of free goods earned but not yet shipped to our customers. On adoption of ASU 2014-09, we reversed this accrual and recorded deferred revenue of $23.3 million relating to these outstanding performance obligations, a deferred tax asset of $1.5 million, and a $4.6 million adjustment to reduce the opening balance of retained earnings at May 1, 2018. We record deferred revenue in accrued expenses in the condensed consolidated balance sheet.
F-17
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The following table outlines the impact of the adoption of ASU 2014-09 on revenue recognized during the year ended April 30, 2019 (in thousands):
Outstanding performance obligations with customers as of May 1, 2018
|
|
$
|
23,305
|
|
Revenue recognized
|
|
|
(51,213
|
)
|
Revenue deferred
|
|
|
40,121
|
|
Outstanding performance obligations with customers as of April 30, 2019
|
|
$
|
12,213
|
|
During fiscal 2019, we recognized $22.2 million of revenue previously deferred as of May 1, 2018 as the performance obligations relating to sales promotions were satisfied. In addition, we deferred $11.1 million during fiscal 2019, net of revenue recognized, as the performance obligations related to sales promotions have not been satisfied, resulting in an outstanding performance obligation liability of $12.2 million that is recorded in accrued expenses in the condensed consolidated balance sheet. During fiscal 2019, we recognized an $11.1 million net increase of revenue relating to the adoption of ASU 2014-09. We estimate that the majority of the revenue from the outstanding performance obligations as of April 30, 2019 will be recognized during our first quarter of fiscal 2020. As a result of the adoption of ASU 2014-09, for the year ended April 30, 2019, gross margin was unfavorably impacted by 400 basis points and earnings per share was increased by $0.03.
5. Goodwill and Intangible Assets
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, 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
|
|
Adjustments
|
|
|
534
|
|
|
|
—
|
|
|
|
534
|
|
Acquisitions
|
|
|
—
|
|
|
|
844
|
|
|
|
844
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
(10,396
|
)
|
|
|
(10,396
|
)
|
Balance as of April 30, 2019
|
|
$
|
19,024
|
|
|
$
|
163,245
|
|
|
$
|
182,269
|
|
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.
The following table presents a summary of intangible assets as of April 30, 2019 and 2018 (in thousands):
|
|
April 30, 2019
|
|
|
April 30, 2018
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Customer relationships
|
|
$
|
92,560
|
|
|
$
|
(41,643
|
)
|
|
$
|
50,917
|
|
|
$
|
92,360
|
|
|
$
|
(28,252
|
)
|
|
$
|
64,108
|
|
Developed technology
|
|
|
21,230
|
|
|
|
(10,428
|
)
|
|
|
10,802
|
|
|
|
21,130
|
|
|
|
(8,178
|
)
|
|
|
12,952
|
|
Patents, trademarks, and trade names
|
|
|
57,477
|
|
|
|
(28,479
|
)
|
|
|
28,998
|
|
|
|
56,718
|
|
|
|
(22,099
|
)
|
|
|
34,619
|
|
Backlog
|
|
|
1,150
|
|
|
|
(1,150
|
)
|
|
|
—
|
|
|
|
1,150
|
|
|
|
(1,150
|
)
|
|
|
—
|
|
|
|
|
172,417
|
|
|
|
(81,700
|
)
|
|
|
90,717
|
|
|
|
171,358
|
|
|
|
(59,679
|
)
|
|
|
111,679
|
|
Patents in progress
|
|
|
897
|
|
|
|
—
|
|
|
|
897
|
|
|
|
855
|
|
|
|
—
|
|
|
|
855
|
|
Total definite-lived intangible assets
|
|
|
173,314
|
|
|
|
(81,700
|
)
|
|
|
91,614
|
|
|
|
172,213
|
|
|
|
(59,679
|
)
|
|
|
112,534
|
|
Indefinite-lived intangible assets
|
|
|
226
|
|
|
|
—
|
|
|
|
226
|
|
|
|
226
|
|
|
|
—
|
|
|
|
226
|
|
Total intangible assets
|
|
$
|
173,540
|
|
|
$
|
(81,700
|
)
|
|
$
|
91,840
|
|
|
$
|
172,439
|
|
|
$
|
(59,679
|
)
|
|
$
|
112,760
|
|
(a)
|
Changes to the gross carrying amount of customer relationships relate to purchase accounting adjustments. For more information regarding the changes in valuation of customer relations, see Note 2
—
Acquisitions
to our consolidated financial statements.
|
F-18
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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 $22.0 million, $21.0 million, and $20.1 million for the fiscal years ended April 30, 2019, 2018, and 2017, respectively.
The following table represents future expected amortization expense as of April 30, 2019, which will primarily be recorded in our Outdoor Products & Accessories segment (in thousands):
Fiscal
|
|
Amount
|
|
2020
|
|
$
|
19,209
|
|
2021
|
|
|
16,595
|
|
2022
|
|
|
14,210
|
|
2023
|
|
|
11,841
|
|
2024
|
|
|
10,093
|
|
Thereafter
|
|
|
18,769
|
|
Total
|
|
$
|
90,717
|
|
6. 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 $81.4 million remains outstanding as of April 30, 2019. 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, 2019, we had no borrowings outstanding under the Revolving Line. Had there been borrowings, they would have bore interest at 4.48%, equal to the LIBOR rate plus an applicable margin. 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.
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, 2019, our interest rate on the Term Loan was 4.48%.
F-19
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 ga
ins or losses) of a derivative instrument depends on whether it has been designated 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 earnings in the same period or periods during which the hedged transaction affects earnings. As of April 30, 201
9
, the interest rate swap was considered effective and had no effect on ear
nings. The fair value of the interest rate swap on April 30, 201
9
and 201
8
was an asset of $
710,000
and $
2.1
million
, 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.
As of 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-20
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 c
overage 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 pr
ior four quarters’ consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) to our consolidated interest expense
. The carrying value of our 2020 Senior Notes as of April 30, 201
9
approximated the fair value in considering Level
2 inputs within the hierarchy.
Debt Issuance Costs
— We did not record any debt issuance costs for the fiscal year ended April 30, 2019. We recorded, in notes payable, $158,000, and $525,000 of debt issuance costs for the fiscal years ended April 30, 2018 and 2017, 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 $431,000, $1.1 million, and $918,000 to interest expense for all debt issuance costs in fiscal 2019, 2018, and 2017, 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, 2019, we had outstanding letters of credit aggregating $1.0 million.
7. Net Sales
The following table sets forth the breakdown of net sales for the fiscal years ended April 30, 2019, 2018, and 2017 (in thousands):
|
For the Years Ended April 30,
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Handguns
|
$
|
|
336,901
|
|
|
$
|
|
326,290
|
|
|
$
|
|
556,566
|
|
Long Guns
|
|
|
107,717
|
|
|
|
|
90,222
|
|
|
|
|
179,612
|
|
Other Products & Services
|
|
|
33,859
|
|
|
|
|
32,474
|
|
|
|
|
36,819
|
|
Firearms Segment
|
|
|
478,477
|
|
|
|
|
448,986
|
|
|
|
|
772,997
|
|
Outdoor Products & Accessories Segment
|
|
|
159,800
|
|
|
|
|
157,864
|
|
|
|
|
130,191
|
|
Total Net Sales
|
$
|
|
638,277
|
|
|
$
|
|
606,850
|
|
|
$
|
|
903,188
|
|
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, Lockdown, Hooyman, BOG, Crimson Trace, Imperial, Schrade, Old Timer, Uncle Henry, BUBBA, UST, LaserLyte, and KeyGear brands.
We also offer firearms accessories and non-firearms accessories, such as
flashlights and knives, under our Firearm brands, including Smith & Wesson, M&P, Performance Center, and Thompson/Center Arms.
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%, 5%, and 3% of total net sales for the fiscal years ended April 30, 2019, 2018, and 2017, respectively (in thousands):
|
For the Years Ended April 30,
|
|
|
Region
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
Europe
|
$
|
|
11,860
|
|
|
$
|
|
9,586
|
|
|
$
|
|
11,545
|
|
|
Asia
|
|
|
3,866
|
|
|
|
|
4,725
|
|
|
|
|
4,046
|
|
|
Latin America
|
|
|
3,268
|
|
|
|
|
2,038
|
|
|
|
|
1,778
|
|
|
All others international
|
|
|
14,030
|
|
|
|
|
12,388
|
|
|
|
|
10,418
|
|
|
Total international net sales
|
$
|
|
33,024
|
|
|
$
|
|
28,737
|
|
|
$
|
|
27,787
|
|
|
F-21
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Our Firearm
s
and Outdoor Products & Accessories segments own tooling that is located at various suppliers in Asia and North America.
8. 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, 2019, 2018, and 2017, amounted to $24.3 million, $25.8 million, and $22.3 million, respectively.
9. Property, Plant, and Equipment
The following table summarizes property, plant, and equipment as of April 30, 2019 and 2018 (in thousands):
|
April 30, 2019
|
|
April 30, 2018
|
|
Machinery and equipment
|
$
|
|
270,815
|
|
$
|
|
251,706
|
|
Software and hardware
|
|
|
47,587
|
|
|
|
43,097
|
|
Building and improvements
|
|
|
34,584
|
|
|
|
29,908
|
|
Land and improvements
|
|
|
3,787
|
|
|
|
3,845
|
|
Capital lease
|
|
|
46,246
|
|
|
—
|
|
|
|
|
403,019
|
|
|
|
328,556
|
|
Less: Accumulated depreciation and amortization
|
|
|
(228,306
|
)
|
|
|
(198,545
|
)
|
|
|
|
174,713
|
|
|
|
130,011
|
|
Construction in progress
|
|
|
8,555
|
|
|
|
29,114
|
|
Total property, plant, and equipment, net
|
$
|
|
183,268
|
|
$
|
|
159,125
|
|
Depreciation of tangible assets and amortization of software expense amounted to $31.4 million, $30.0 million, and $29.2 million for the fiscal years ended April 30, 2019, 2018, and 2017, respectively. The large decrease in construction in progress resulted from the majority of the assets associated with our national logistics facility being placed into service in fiscal 2019.
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, 2019, 2018, and 2017 (in thousands):
|
For the Years Ended April 30,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Cost of sales
|
$
|
|
23,797
|
|
$
|
|
24,582
|
|
$
|
|
24,744
|
|
Research and development
|
|
|
625
|
|
|
|
557
|
|
|
|
428
|
|
Selling and marketing
|
|
|
530
|
|
|
|
619
|
|
|
|
424
|
|
General and administrative (a)
|
|
|
28,476
|
|
|
|
25,212
|
|
|
|
23,699
|
|
Interest expense
|
|
|
431
|
|
|
|
1,105
|
|
|
|
918
|
|
Total depreciation and amortization
|
$
|
|
53,859
|
|
$
|
|
52,075
|
|
$
|
|
50,213
|
|
(a)
|
General and administrative expenses included $21.8 million, $20.8 million, and $18.4 million of amortization for the fiscal years ended April 30, 2019, 2018, and 2017, respectively, which were recorded as a result of our acquisitions.
|
F-22
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
10
. Inventories
The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or market, as of April 30, 2019 and 2018 (in thousands):
|
|
April 30, 2019
|
|
|
April 30, 2018
|
|
Finished goods
|
|
$
|
108,247
|
|
|
$
|
91,480
|
|
Finished parts
|
|
|
36,181
|
|
|
|
42,075
|
|
Work in process
|
|
|
7,576
|
|
|
|
7,657
|
|
Raw material
|
|
|
11,766
|
|
|
|
12,141
|
|
Total inventories
|
|
$
|
163,770
|
|
|
$
|
153,353
|
|
11. Accrued Expenses and Deferred Revenue
The following table sets forth other accrued expenses as of April 30, 2019 and 2018 (in thousands):
|
|
April 30, 2019
|
|
|
April 30, 2018
|
|
Deferred revenue
|
|
$
|
12,213
|
|
|
$
|
—
|
|
Accrued employee benefits
|
|
|
5,241
|
|
|
|
5,741
|
|
Accrued taxes other than income
|
|
|
6,078
|
|
|
|
3,933
|
|
Accrued rebates and promotions (a)
|
|
|
4,877
|
|
|
|
21,339
|
|
Accrued professional fees
|
|
|
2,649
|
|
|
|
2,332
|
|
Accrued distributor incentives
|
|
|
1,895
|
|
|
|
1,502
|
|
Accrued commissions
|
|
|
1,004
|
|
|
|
1,342
|
|
Interest payable
|
|
|
737
|
|
|
|
930
|
|
Current portion of capital lease obligation
|
|
|
681
|
|
|
|
431
|
|
Accrued other
|
|
|
3,947
|
|
|
|
4,082
|
|
Total accrued expenses and deferred revenue
|
|
$
|
39,322
|
|
|
$
|
41,632
|
|
(a)
|
Decrease in rebates and promotions from fiscal 2018 is due to the adoption of ASU 2014-09 in fiscal 2019. For more information regarding these transactions, see Note 4 —
Revenue Recognition and Contracts with Customers.
|
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 $41.0 million and $48.9 million as of April 30, 2019 and 2018, respectively. We utilized Level 1 of the value hierarchy to determine the fair values of these assets.
F-23
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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 t
he 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).
|
The carrying value of our Term Loan approximated the fair value as of April 30, 2019 in considering Level 2 inputs within the hierarchy. The carrying value of our 2020 Senior Notes as of April 30, 2019 approximated the fair value in considering Level 2 inputs within the hierarchy as our 2020 Senior Notes are not frequently traded. The 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 6 —
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 forecasted revenue, during fiscal 2018, we recorded a $1.6 million reduction in the fair value of this contingent consideration liability because we did not expect that the acquired business would achieve the performance metrics. During fiscal 2019, we recorded a $60,000 reduction in the remaining fair value of this contingent liability because we confirmed the performance metrics were not achieved. These reductions were recorded in other income on the condensed consolidated statements of income.
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, 2019 and 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, 2019 and 2018, we had reserves for workers’ compensation, product liability, municipal liability, and medical/dental costs totaling $8.9 million and $9.2 million, respectively, of which $4.8 million was classified as other non-current liabilities. As of April 30, 2019 and 2018, $3.6 million and $3.9 million, respectively, were included in accrued expenses on the accompanying consolidated balance sheets. In addition, as of April 30, 2019 and 2018, $620,000 and $590,000, respectively, 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.
F-24
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The following table
summarizes
the activity in the workers’ compensation, product liability, municipal liability, and medical/dental reserves in the fiscal
years ended April 30, 201
9
, 201
8
, and 201
7
(in thousands):
|
For the Year Ended April 30,
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
$
|
|
9,173
|
|
|
$
|
|
8,663
|
|
|
$
|
|
10,082
|
|
Additional provision charged to expense
|
|
|
21,602
|
|
|
|
|
22,802
|
|
|
|
|
15,801
|
|
Payments
|
|
|
(21,916
|
)
|
|
|
|
(22,292
|
)
|
|
|
|
(17,220
|
)
|
Ending balance
|
$
|
|
8,859
|
|
|
$
|
|
9,173
|
|
|
$
|
|
8,663
|
|
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 likely 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, 2019 and 2018, we had accrued reserves for product and municipal litigation liabilities of $3.3 million and $3.4 million, respectively (of which $2.8 million was non-current), consisting entirely of expected legal defense costs. In addition, as of April 30, 2019 and 2018, 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.
During fiscal 2019, that authorized repurchase program expired, resulting in no remaining authorized repurchase programs as of April 30, 2019. Prior to this authorized repurchase program, in fiscal 2017, we repurchased 2.6 million shares of our common stock in the open market for $50.0 million, utilizing a combination of cash on hand and borrowings under our Revolving Line. We did not repurchase any shares of our common stock during fiscal 2019 or 2018.
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.
F-25
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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.
The number of shares and weighted average exercise prices of options for the fiscal years ended April 30, 2019, 2018, and 2017 are as follows:
|
|
For the Year Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
Options outstanding, beginning of year
|
|
|
316,160
|
|
|
$
|
6.69
|
|
|
|
335,160
|
|
|
$
|
6.58
|
|
|
|
389,360
|
|
|
$
|
6.16
|
|
Exercised during the period
|
|
|
(48,399
|
)
|
|
|
6.28
|
|
|
|
(19,000
|
)
|
|
|
4.70
|
|
|
|
(54,200
|
)
|
|
|
3.57
|
|
Options outstanding, end of period
|
|
|
267,761
|
|
|
$
|
6.76
|
|
|
|
316,160
|
|
|
$
|
6.69
|
|
|
|
335,160
|
|
|
$
|
6.58
|
|
Weighted average remaining contractual
life
|
|
2.35
years
|
|
|
|
|
|
|
3.16
years
|
|
|
|
|
|
|
4.01
years
|
|
|
|
|
|
Options exercisable, end of period
|
|
|
267,761
|
|
|
$
|
6.76
|
|
|
|
316,160
|
|
|
$
|
6.69
|
|
|
|
335,160
|
|
|
$
|
6.58
|
|
Weighted average remaining contractual life
|
|
2.35
years
|
|
|
|
|
|
|
3.16
years
|
|
|
|
|
|
|
4.01
years
|
|
|
|
|
|
As of April 30, 2019, there were 4,404,603 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, 2019, 2018, and 2017 was $826,000, $1.4 million, and $5.2 million, respectively. The aggregate intrinsic value of the options exercised for the years ended April 30, 2019, 2018, and 2017 was $285,000, $116,000, and $1.3 million, respectively. At April 30, 2019, 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, 2019, 2018, and 2017 (in thousands):
|
|
For the Years Ended April 30,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
Cost of sales
|
|
$
|
746
|
|
|
$
|
882
|
|
|
$
|
1,139
|
|
Research and development
|
|
|
99
|
|
|
|
187
|
|
|
|
217
|
|
Selling and marketing
|
|
|
489
|
|
|
|
382
|
|
|
|
801
|
|
General and administrative
|
|
|
6,658
|
|
|
|
6,364
|
|
|
|
6,433
|
|
Total stock-based compensation
|
|
$
|
7,992
|
|
|
$
|
7,815
|
|
|
$
|
8,590
|
|
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,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Grant date fair market value
|
|
|
|
|
|
|
|
|
|
|
|
|
American Outdoor Brands Corporation
|
|
$
|
9.85
|
|
|
$
|
11.11
|
|
|
$
|
21.89
|
|
Russell 2000 Index
|
|
$
|
1,591.21
|
|
|
$
|
1,557.89
|
|
|
$
|
1,417.13
|
|
Volatility (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
American Outdoor Brands Corporation
|
|
|
45.19
|
%
|
|
|
42.27
|
%
|
|
|
41.67
|
%
|
Russell 2000 Index
|
|
|
15.65
|
%
|
|
|
16.26
|
%
|
|
|
16.77
|
%
|
Correlation coefficient (b)
|
|
|
0.14
|
|
|
|
0.19
|
|
|
0.22
|
|
Risk-free interest rate (c)
|
|
|
2.23
|
%
|
|
|
2.61
|
%
|
|
|
1.44
|
%
|
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 fiscal year ended April 30, 2019, we granted 181,600 PSUs to certain of our executive officers. We also granted 360,185 service-based RSUs during the year ended April 30, 2019, including 167,818 RSUs to certain of our executive officers, 49,509 RSUs to our directors, and 142,858 RSUs to non-executive officer employees. Compensation expense recognized related to grants of RSUs and PSUs was $7.3 million for the fiscal year ended April 30, 2019.
During the fiscal year ended April 30, 2019, we canceled 33,899 service-based RSUs as a result of the service period condition not being met and 112,000 PSUs as the three year stock performance targets were not achieved. We delivered 206,572 shares of common stock to current employees under vested RSUs and PSUs with a total market value of $2.5 million.
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.
F-27
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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 ex
pense recognized related to grants of RSUs and PSUs was $7.8 million for the fiscal year ended April 30, 2017.
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.
The grant date fair value of RSUs and PSUs that vested in fiscal 2019 was $3.9 million and in fiscal 2018 and 2017 was $5.0 million.
A summary of activity for unvested RSUs and PSUs for fiscal years 2019, 2018, and 2017 is as follows:
|
|
For the Year Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
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
|
|
|
1,442,317
|
|
|
$
|
17.80
|
|
|
|
1,428,848
|
|
|
$
|
18.58
|
|
|
|
1,215,753
|
|
|
|
$
|
15.38
|
|
Awarded
|
|
|
541,785
|
|
|
|
10.65
|
|
|
|
561,890
|
|
|
|
15.09
|
|
|
|
666,509
|
|
|
|
|
19.85
|
|
Vested
|
|
|
(206,572
|
)
|
|
|
19.11
|
|
|
|
(300,496
|
)
|
|
|
16.53
|
|
|
|
(433,966
|
)
|
|
|
|
11.64
|
|
Forfeited
|
|
|
(145,899
|
)
|
|
|
16.11
|
|
|
|
(247,925
|
)
|
|
|
17.04
|
|
|
|
(19,448
|
)
|
|
|
|
17.19
|
|
RSUs and PSUs outstanding, end of period
|
|
|
1,631,631
|
|
|
$
|
15.44
|
|
|
|
1,442,317
|
|
|
$
|
17.80
|
|
|
|
1,428,848
|
|
|
|
$
|
18.58
|
|
As of April 30, 2019, there was $7.7 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 2019, 2018, and 2017, 230,282, 203,002, and 144,102 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, 2019, 2018, and 2017:
|
For the Years Ended April 30,
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
2.21
|
%
|
|
|
1.62
|
%
|
|
|
0.60
|
%
|
Expected term
|
6 months
|
|
|
6 months
|
|
|
6 months
|
|
Expected volatility
|
|
45.3
|
%
|
|
|
42.3
|
%
|
|
|
45.3
|
%
|
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 $8.0 million, $7.8 million, and $8.6 million, for fiscal years 2019, 2018, and 2017, 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 $2.9 million, $3.0 million, and $2.7 million for the fiscal years ended April 30, 2019, 2018, and 2017, 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 2019, we plan to contribute approximately $2.8 million, which has been recorded in general and administrative costs. We contributed $1.3 million and $13.0 million for the fiscal years ended April 30, 2018 and 2017, respectively. Contributions are funded after the fiscal year-end.
16. Income Taxes
Income tax expense/(benefit) from continuing operations consists of the following (in thousands):
|
|
For the Year Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
8,999
|
|
|
$
|
|
5,081
|
|
|
$
|
|
61,943
|
|
State
|
|
|
|
2,600
|
|
|
|
|
1,184
|
|
|
|
|
9,349
|
|
Foreign
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
Total current
|
|
|
|
11,604
|
|
|
|
|
6,265
|
|
|
|
|
71,292
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal
|
|
|
|
(879
|
)
|
|
|
|
(9,081
|
)
|
|
|
|
(6,969
|
)
|
Deferred state
|
|
|
|
(397
|
)
|
|
|
|
305
|
|
|
|
|
(871
|
)
|
Total deferred
|
|
|
|
(1,276
|
)
|
|
|
|
(8,776
|
)
|
|
|
|
(7,840
|
)
|
Total income tax expense/(benefit)
|
|
$
|
|
10,328
|
|
|
$
|
|
(2,511
|
)
|
|
$
|
|
63,452
|
|
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 thousands):
|
|
For the Year Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Federal income taxes expected at the statutory rate (a)
|
|
$
|
|
6,035
|
|
|
$
|
|
5,355
|
|
|
$
|
|
66,957
|
|
State income taxes, less federal income tax benefit
|
|
|
|
1,804
|
|
|
|
|
1,460
|
|
|
|
|
5,310
|
|
Stock compensation
|
|
|
|
708
|
|
|
|
|
(322
|
)
|
|
|
|
(3,092
|
)
|
Business meals and entertainment
|
|
|
|
181
|
|
|
|
|
302
|
|
|
|
|
296
|
|
Domestic production activity deduction
|
|
|
—
|
|
|
|
|
(335
|
)
|
|
|
|
(5,728
|
)
|
Research and development tax credit
|
|
|
|
(567
|
)
|
|
|
|
(426
|
)
|
|
|
|
(453
|
)
|
Goodwill impairment
|
|
|
|
2,183
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
|
54
|
|
|
|
|
(403
|
)
|
|
|
|
162
|
|
Federal tax rate change on deferred taxes
|
|
|
|
(70
|
)
|
|
|
|
(8,142
|
)
|
|
|
|
—
|
|
Total income tax expense/(benefit)
|
|
$
|
|
10,328
|
|
|
$
|
|
(2,511
|
)
|
|
$
|
|
63,452
|
|
(a)
|
We had a statutory rate of 21% in fiscal 2019, a blended statutory rate of 30.4% in fiscal 2018 because of Tax Reform, and a statutory rate of 35% in fiscal 2017.
|
Deferred tax assets (liabilities) related to temporary differences are the following (in thousands):
|
|
For the Years Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
Non-current tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards and tax credits
|
|
$
|
3,256
|
|
|
$
|
3,372
|
|
Inventories
|
|
|
6,741
|
|
|
|
6,204
|
|
Accrued expenses, including compensation
|
|
|
5,800
|
|
|
|
3,037
|
|
Environmental reserves
|
|
|
181
|
|
|
|
258
|
|
Product liability
|
|
|
360
|
|
|
|
353
|
|
Accrued promotions
|
|
|
73
|
|
|
|
1,061
|
|
Workers' compensation
|
|
|
478
|
|
|
|
485
|
|
Warranty reserve
|
|
|
1,525
|
|
|
|
1,843
|
|
Stock-based compensation
|
|
|
3,884
|
|
|
|
3,576
|
|
State bonus depreciation
|
|
|
1,454
|
|
|
|
1,117
|
|
Property taxes
|
|
|
(185
|
)
|
|
|
(160
|
)
|
Property, plant, and equipment
|
|
|
(20,392
|
)
|
|
|
(18,434
|
)
|
Intangible assets
|
|
|
(10,006
|
)
|
|
|
(12,510
|
)
|
Pension
|
|
|
234
|
|
|
|
218
|
|
Other
|
|
|
397
|
|
|
|
21
|
|
Less valuation allowance
|
|
|
(3,576
|
)
|
|
|
(3,336
|
)
|
Net deferred tax asset/(liability) — total
|
|
$
|
(9,776
|
)
|
|
$
|
(12,895
|
)
|
We had federal net operating loss carryforwards amounting to $108,000 as of April 30, 2019, 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 2019 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 in state net operating loss carryforwards as of April 30, 2019 and 2018. The state net operating loss carryforwards will expire between April 30, 2025 and April 30, 2038. There were $2.9 million and $3.1 million of state tax credit carryforwards as of April 30, 2019 and 2018, respectively. The state tax credit carryforwards will expire between April 30, 2023 and April 30, 2025 or have no expiration date.
F-30
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
As of April 30, 201
9
, valuation allowances of $9
11
,000 and $2.
3
million were provided on our deferred tax assets for those state net o
perating loss carryforwards, and state tax credits, respectively, that we do not anticipate using prior to their expiration. As of April 30, 201
8
, valuation allowances of $
921
,000 and $2.
4
million were provided on our deferred tax assets for those state ne
t operating loss carryforwards and state tax credits, respectively, that we do not anticipate using prior to their expiration.
Additional v
aluation allowances
of $342,000
were provided on our deferred income tax assets as of April 30, 201
9
, as we believe t
hat it is more likely than not that all such assets will be realized.
These allowances related to IRC Section 162(m) limitations on the deductibility of certain executive compensation.
Recording a valuation allowance or reversing a valuation allowance coul
d 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 from 35% to 21%, limiting various deductions, and repealing the domestic manufacturing deduction.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118, or SAB118, that provided 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. This measurement period was not permitted to extend beyond one year from the Tax reform enactment date. 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 was able to determine a reasonably estimating the effects, we were permitted to record a provisional estimate in our financial statements. All provisional estimates related to Tax Reform were finalized within the measurement period.
The income tax provisions (benefit) represent effective tax rates of 35.9% and (14.3%) for the fiscal year ended April 30, 2019 and 2018, 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%.
U.S. income taxes have not been provided on $50,000 of undistributed earnings of our foreign subsidiary since it is our intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, we would not be subject to U.S. tax as a result of the Tax Act but could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical.
At April 30, 2019 and 2018, 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, 2015.
17. Commitments and Contingencies
Litigation
In January 2018, Gemini Technologies, Incorporated, or Gemini, commenced an action against us and Smith & Wesson Corp. in the United States District Court for the District of Idaho, or District Court. The complaint alleges, among other things, that the defendants breached the earn-out and other provisions of the Asset Purchase Agreement and ancillary agreements between the parties in connection with Smith & Wesson Corp.’s acquisition of the Gemtech business from Gemini. The complaint seeks a declaratory judgment interpreting various terms of the Asset Purchase Agreement and damages in the sum of $18.6 million. In May 2018, the District Court dismissed the complaint on the grounds of
forum non conveniens.
In June 2018, Gemini appealed the decision dismissing its complaint to the U.S. Court of Appeals for the Ninth Circuit. Oral argument was held before the Court of Appeals on May 14, 2019. We believe the claims asserted in the complaint have no merit, and we intend to aggressively defend this action.
F-31
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
We are a defendant in six product liability cases and a
re aware of
five
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, India
na against numerous firearm manufacturers, distributors, and dealers seeking to recover monetary damages, as well as injunctive relief, allegedly arising out of the misuse of firearms by third parties. In January 2018, the trial court granted defendants’ M
otion for Judgment on the Pleadings, dismissing the case in its entirety. In February 2018, plaintiffs appealed the dismissal to the Indiana Court of Appeals.
On May 23, 2019, the Indiana Court of Appeals issued a decision, which affirmed in part and rever
sed in part and remanded for further proceedings, the trial court’s dismissal of the City’s complaint. The parties have until July 8, 2019 to file petitions to transfer jurisdiction to the Indiana Supreme Court.
In May 2018, we were named in an action rel
ated 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 l
awfully sold firearms are later used in criminal acts only applies to civil actions commenced by governmental agencies not private litigants. In August 2018, we moved to dismiss the complaint on the grounds that it seeks an impermissible advisory opinion.
On December 6, 2018, the court granted defendants’ motion to dismiss without prejudice and granted pla
i
ntiffs leave to amend their complaint. On December 10, 2018, plaintiffs filed a Second Amended Complaint for Declaratory Relief. On December 13, 2018,
defendants filed a Motion to Dismiss Plaintiffs’ Second Amended Complaint. A hearing was held on defendants’ second motion to dismiss on December 17, 2018. A decision has not yet been issued by the court.
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, from time to time, 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, 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 a review of the merit 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, 2019, 2018, and 2017, we paid $322,000, $473,000, and $254,000, respectively, in defense and administrative costs relative to product liability and municipal litigation. In addition, we spent an aggregate of $180,000, $129,000, and $209,000, 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.
F-32
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
We
recognize gains and expenses for changes in our product liability provisions and municipal litigation liabilities.
In fiscal 201
9
, we recorded expense of $
293
,000; in fiscal 201
8
, we recorded
expense
of
$
540
,00
0; and in fiscal 201
7
, we recorded
a gain
of
$
364
,000.
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, 2019 and 2018, we recorded approximately $725,000 and $1.0 million, 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.
F-33
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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 f
lows. 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 remedie
s 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.
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 this new 633,000 square foot facility, which was completed in November 2018 and will become operational over the course of the remainder of fiscal 2020. As part of the completion of the building, we entered into a lease agreement with the developer of the building for $46.2 million.
The lease has an effective interest rate of approximately 5.0% and is payable in 240 monthly installments through fiscal 2039. Leases are accounted for under the provisions of ASC 840-10,
Leases
, which requires that leases be evaluated and classified as operating or capital leases for financial reporting purposes. Based on our evaluation under ASC 840-10, we determined that the lease qualified as a capital lease because the net present value of future lease payments exceeded 90% of the fair market value of the leased building. The building is pledged to secure the amounts outstanding. We included $681,000 of short-term capital lease obligation in accrued expenses and $45.6 million in long-term capital lease obligation on the condensed consolidated balance sheet. As noted above, we plan to adopt ASU
2016-02 -
Leases
, in our first quarter of fiscal 2020. Upon adoption, we plan to remove the current finance obligation and capital lease asset and record a right of use asset and lease liability equal to the net present value of future minimum lease payments. We expect the lease liability to be $40.8 million and right of use asset to be $41.6 million upon adoption of ASU 2016-02.
Future minimum lease payments, including all our capital leases, for succeeding fiscal years is as follows (in thousands):
|
|
Capital Lease
Obligation
|
|
2020
|
|
|
2,965
|
|
2021
|
|
|
3,016
|
|
2022
|
|
|
3,056
|
|
2023
|
|
|
3,071
|
|
2024
|
|
|
3,126
|
|
Thereafter
|
|
|
63,263
|
|
Total future minimum lease payments
|
|
|
78,497
|
|
Less amounts representing interest
|
|
|
(32,416
|
)
|
Present value of minimum lease payments
|
|
|
46,081
|
|
Less current maturities of capital lease
|
|
|
(681
|
)
|
Long-term maturities of capital lease
|
|
$
|
45,400
|
|
F-34
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The following summarizes our
operating leases for office and/or manufacturing space:
Location of Lease
|
|
Expiration Date
|
Bentonville, Arkansas
|
|
December 31, 2023
|
Jacksonville, Florida
|
|
June 30, 2019
|
Shenzhen, China
|
|
October 31, 2019
|
Springfield, Massachusetts
|
|
November 30, 2020
|
Houlton, Maine
|
|
January 31, 2022
|
Scottsdale, Arizona
|
|
April 30, 2021
|
Somersworth, New Hampshire
|
|
June 30, 2021
|
Wilsonville, Oregon
|
|
October 31, 2022
|
Columbia, Missouri
|
|
April 30, 2023
|
Columbia, Missouri
|
|
November 25, 2038
|
Deep River, Connecticut
|
|
May 4, 2024
|
Meridian, Idaho
|
|
October 14, 2027
|
Herstal, Belgium
|
|
January 21, 2027
|
We also lease machinery, photocopiers, and vehicles for our national sales force with various expiration dates.
As of April 30, 2019, the operating lease commitments were as follows (in thousands):
For the Year Ended April 30,
|
|
Amount
|
|
2020
|
|
$
|
|
3,639
|
|
2021
|
|
|
|
3,154
|
|
2022
|
|
|
|
2,786
|
|
2023
|
|
|
|
2,583
|
|
2024
|
|
|
|
1,562
|
|
Thereafter
|
|
|
|
946
|
|
|
|
|
|
|
|
|
|
$
|
|
14,670
|
|
Rent expense in the fiscal years ended April 30, 2019, 2018, and 2017 was $5.0 million, $5.2 million, and $4.4 million, respectively.
18. Quarterly Financial Information (Unaudited)
The following table summarizes quarterly financial results in fiscal 2019 and 2018. 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, 2019
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
Net sales
|
$
|
|
138,833
|
|
|
$
|
|
161,703
|
|
|
$
|
|
162,008
|
|
|
$
|
|
175,733
|
|
|
$
|
|
638,277
|
|
Gross profit
|
|
|
52,422
|
|
|
|
|
56,386
|
|
|
|
|
54,059
|
|
|
|
|
63,364
|
|
|
|
|
226,231
|
|
Net income
|
$
|
|
7,645
|
|
|
$
|
|
6,665
|
|
|
$
|
|
(5,725
|
)
|
(b)
|
$
|
|
9,825
|
|
|
$
|
|
18,410
|
|
Per common share (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - total
|
$
|
|
0.14
|
|
|
$
|
|
0.12
|
|
|
$
|
|
(0.10
|
)
|
|
$
|
|
0.18
|
|
|
$
|
|
0.34
|
|
Diluted - total
|
$
|
|
0.14
|
|
|
$
|
|
0.12
|
|
|
$
|
|
(0.10
|
)
|
|
$
|
|
0.18
|
|
|
$
|
|
0.33
|
|
F-35
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
|
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
|
|
(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)
|
Amounts includes a $10.4 million non-cash goodwill impairment relating to our Outdoor Products & Accessories segement.
|
(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.
|
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. 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 has been determined to be a single operating segment and reporting segment based on our 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, 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, 2019 and 2018 (in thousands):
|
|
As of April 30, 2019
|
|
|
As of April 30, 2018
|
|
|
|
Firearms
|
|
|
Outdoor
Products
&
Accessories
|
|
|
Total
|
|
|
Firearms
|
|
|
Outdoor
Products &
Accessories
|
|
|
Total
|
|
Total assets
|
|
$
|
389,719
|
|
|
$
|
377,070
|
|
|
$
|
766,789
|
|
|
$
|
346,517
|
|
|
$
|
398,543
|
|
|
$
|
745,060
|
|
Property, plant, and equipment, net
|
|
|
170,549
|
|
|
|
12,719
|
|
|
|
183,268
|
|
|
|
146,154
|
|
|
|
12,971
|
|
|
|
159,125
|
|
Intangibles, net
|
|
|
4,661
|
|
|
|
87,179
|
|
|
|
91,840
|
|
|
|
4,944
|
|
|
|
107,816
|
|
|
|
112,760
|
|
Goodwill
|
|
|
19,024
|
|
|
|
163,245
|
|
|
|
182,269
|
|
|
|
18,490
|
|
|
|
172,797
|
|
|
|
191,287
|
|
F-36
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Results by business segment are presented in the following table for the years ended April 30, 201
9
, 201
8
, and 201
7
(in thousands):
|
|
For the Year Ended April 30, 2019 (a)
|
|
|
|
Firearms
|
|
|
Outdoor
Products &
Accessories
|
|
|
Corporate
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
478,477
|
|
|
$
|
159,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
638,277
|
|
Intersegment revenue
|
|
|
2,858
|
|
|
|
17,469
|
|
|
|
—
|
|
|
|
(20,327
|
)
|
|
|
—
|
|
Total net sales
|
|
|
481,335
|
|
|
|
177,269
|
|
|
|
—
|
|
|
|
(20,327
|
)
|
|
|
638,277
|
|
Cost of sales
|
|
|
335,051
|
|
|
|
97,143
|
|
|
|
—
|
|
|
|
(20,148
|
)
|
|
|
412,046
|
|
Gross margin
|
|
|
153,787
|
|
|
|
80,127
|
|
|
|
—
|
|
|
|
(7,683
|
)
|
|
|
226,231
|
|
Operating income/(loss)
|
|
|
59,663
|
|
|
|
(18,414
|
)
|
(b)
|
|
(44,831
|
)
|
|
|
41,638
|
|
|
|
38,056
|
|
Income tax expense/(benefit)
|
|
|
12,068
|
|
|
|
(966
|
)
|
|
|
(774
|
)
|
|
|
—
|
|
|
|
10,328
|
|
|
|
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
|
|
(c)
|
|
93,822
|
|
|
|
—
|
|
|
|
(15,613
|
)
|
|
|
411,098
|
|
Gross margin
|
|
|
119,903
|
|
|
|
77,859
|
|
|
|
—
|
|
|
|
(2,010
|
)
|
|
|
195,752
|
|
Operating income/(loss)
|
|
|
30,213
|
|
|
|
(5,508
|
)
|
(d)
|
|
(44,128
|
)
|
|
|
46,471
|
|
|
|
27,048
|
|
Income tax expense/(benefit) (e)
|
|
|
16,729
|
|
|
|
(8,059
|
)
|
|
|
(11,181
|
)
|
|
|
—
|
|
|
|
(2,511
|
)
|
|
|
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
|
|
(f)
|
|
—
|
|
|
|
(11,840
|
)
|
|
|
527,916
|
|
Gross margin
|
|
|
312,619
|
|
|
|
64,985
|
|
|
|
—
|
|
|
|
(2,332
|
)
|
|
|
375,272
|
|
Operating income/(loss)
|
|
|
201,442
|
|
|
|
(3,949
|
)
|
(g)
|
|
(47,787
|
)
|
|
|
50,233
|
|
|
|
199,939
|
|
Income tax expense/(benefit)
|
|
|
77,585
|
|
|
|
(2,300
|
)
|
|
|
(11,833
|
)
|
|
|
—
|
|
|
|
63,452
|
|
(a)
|
For the years ended April 30, 2019, 2018, and 2017, 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 a non-cash goodwill charge of $10.4 million and $21.5 million of amortization of intangible assets identified as a result of our acquisition.
|
(
c
)
|
Amount includes $500,000 of additional cost of goods sold from the fair value inventory step-up related to our 2018 Acquisitions.
|
(
d
)
|
Amount includes $20.8 million of amortization of intangible assets identified as a result of our acquisitions.
|
(
e
)
|
Amounts include an income tax benefit of approximately $8.7 million, primarily caused by the effect of Tax Reform, which resulted in the re-measurement of deferred tax assets and liabilities at lower enacted corporate federal tax rates.
|
(
f
)
|
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.
|
(
g
)
|
Amount includes $18.4 million of amortization of intangible assets identified as a result of our acquisitions.
|
F-37
AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
20
.
Subsequent Events:
On June 18, 2019, we approved a restructuring plan involving the previously announced consolidation of the Electro-Optics division into the Outdoor Products & Accessories division in order to improve efficiencies. We expect to incur restructuring charges of approximately $1.0 million comprising severance, retention, and relocation costs to be recorded primarily in the first six months of fiscal year 2020. We expect cash expenditures associated with these actions will continue into the third and fourth quarters of fiscal year 2020. The restructuring plan is anticipated to result in cost savings of approximately $1.0 million in the second half of fiscal year 2020 and approximately $4.0 million of annual cost reductions to be fully reflected in our consolidated financial statements by fiscal year 2021.
F-38