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EX-32.2 - EX-32.2 - AMERICAN OUTDOOR BRANDS CORPaobc-ex322_296.htm
EX-32.1 - EX-32.1 - AMERICAN OUTDOOR BRANDS CORPaobc-ex321_295.htm
EX-31.2 - EX-31.2 - AMERICAN OUTDOOR BRANDS CORPaobc-ex312_294.htm
EX-31.1 - EX-31.1 - AMERICAN OUTDOOR BRANDS CORPaobc-ex311_293.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended October 31, 2017

Commission File No. 001-31552

 

American Outdoor Brands Corporation

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

87-0543688

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2100 Roosevelt Avenue

Springfield, Massachusetts

 

01104

(Address of principal executive offices)

 

(Zip Code)

(800) 331-0852

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

  

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

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

The registrant had 54,114,191 shares of common stock, par value $0.001, outstanding as of December 5, 2017.

 

 


AMERICAN OUTDOOR BRANDS CORPORATION

Quarterly Report on Form 10-Q

For the Three and Six Months Ended October 31, 2017 and 2016

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

4

 

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

  

24

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

33

 

Item 4. Controls and Procedures

  

33

 

 

 

 

PART II - OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

34

 

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

 

34

 

Item 6. Exhibits

  

34

Signatures

  

36

EX-31.1

  

 

EX-31.2

  

 

EX-32.1

  

 

EX-32.2

  

 

EX-10.114

 

 

EX-10.115

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

 

 

 

 

 


Statement Regarding Forward-Looking Information

 

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding the impact, if any, of recently issued accounting standards on our consolidated financial statements; the expected performance of acquired businesses; our assessment of factors relating to the valuation of assets acquired and liabilities assumed in acquisitions, the timing for such evaluations, and the potential adjustment in such evaluations; estimated preliminary allocation of purchase price for acquired businesses; assessments that we make about determining segments and reporting units; the features of our outstanding debt and our expectation that our interest rate swap will not have any material effect on our earnings or our consolidated financial statements within the next 12 months; estimated amortization expense of intangible assets for future periods; the potential for impairment charges; potential repurchases of our common stock; the outcome of the lawsuits to which we are subject and their effect on us; our belief concerning the reasons for the reduction in adjusted NICS; our belief that revenue and profitability in the second fiscal quarter and first six months of fiscal 2018 were impacted by lower shipments across nearly all product lines as customer orders softened due to excessive channel inventories from multiple manufacturers combined with lower consumer demand; our belief that demand in the prior comparable periods was heightened primarily because of news events, including terrorism, as well as the political environment that may have caused concerns related to potential firearm ownership restrictions leading up to the presidential election; our belief that our promotions on certain products in our fourth fiscal quarter of 2017 exceeded our expectations and may have pulled forward shipments into the prior fiscal year, contributing to reduced firearm orders during the second fiscal quarter and the six months ended October 31, 2017; our belief that excessive inventory from multiple manufacturers at retail locations has slowed firearm orders; our belief that inventory levels, both internally and in the distribution channel in excess of demand, may negatively impact future operating results; our belief that it is difficult to forecast the potential impact of distributor inventories on future revenue and income as demand is impacted by many factors, including seasonality, new product introductions, news events and consumer tastes; our belief that inventory levels are expected to decrease in the second half of fiscal 2018 as a result of the manufacturing reductions, the expected traditional upswing in sales that seasonally occurs as a result of the fall hunting and holiday seasons, new product introductions, and winter distributor buying shows which typically result in peak sales during our fourth fiscal quarter; our belief that promotional product discounts helped increase or maintain market share for certain products; the effects of acquisitions on our overall financial performance, our assessment of our acquisitions, including the quality and strength of their products; our assessment of consumer demand and factors that stimulate demand for our products; the effect on our business of various factors, including terrorism and the level of political pressures on firearm laws and regulations; future investments for capital expenditures; future products and product developments; the features, quality, and performance of our products; the success of particular product or marketing programs; our market share and factors that affect our market share; and liquidity and anticipated cash needs and availability. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors could cause actual results to differ materially from those indicated by the forward-looking statements, including the demand for our products; the costs and ultimate conclusion of certain legal matters; the state of the U.S. economy in general and the firearm industry in particular; general economic conditions and consumer spending patterns; the competitive environment; the supply, availability, and costs of raw materials and components; the potential for increased regulation of firearms and firearm-related products; speculation surrounding fears of terrorism and crime; our anticipated growth and growth opportunities; our ability to increase demand for our products in various markets, including consumer, law enforcement, and military channels, domestically and internationally; the position of our hunting products in the consumer discretionary marketplace and distribution channel; our penetration rates in new and existing markets; our strategies; our ability to maintain and enhance brand recognition and reputation; risks associated with the establishment of our new 632,000 square foot national distribution center; our ability to introduce new products; the success of new products; our ability to expand our markets; our ability to integrate acquired businesses in a successful manner; the general growth of our outdoor products and accessories business; the potential for cancellation of orders from our backlog; and other factors detailed from time to time in our reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended April 30, 2017, filed with the SEC on June 29, 2017.


PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

As of:

 

 

October 31, 2017

 

 

April 30, 2017

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

68,171

 

 

$

61,549

 

Accounts receivable, net of allowance for doubtful accounts of $1,301 on October 31, 2017

   and $598 on April 30, 2017

 

81,771

 

 

 

108,444

 

Inventories

 

178,946

 

 

 

131,682

 

Prepaid expenses and other current assets

 

7,630

 

 

 

6,123

 

Income tax receivable

 

11,280

 

 

 

10,643

 

Total current assets

 

347,798

 

 

 

318,441

 

Property, plant, and equipment, net

 

143,774

 

 

 

149,685

 

Intangibles, net

 

123,419

 

 

 

141,317

 

Goodwill

 

191,098

 

 

 

169,017

 

Other assets

 

10,174

 

 

 

9,576

 

 

$

816,263

 

 

$

788,036

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

45,522

 

 

$

53,447

 

Accrued expenses

 

37,312

 

 

 

51,686

 

Accrued payroll and incentives

 

9,629

 

 

 

21,174

 

Accrued income taxes

 

230

 

 

 

726

 

Accrued profit sharing

 

2,605

 

 

 

13,004

 

Accrued warranty

 

5,170

 

 

 

4,908

 

Current portion of notes and loans payable

 

81,300

 

 

 

6,300

 

Total current liabilities

 

181,768

 

 

 

151,245

 

Deferred income taxes

 

21,334

 

 

 

25,620

 

Notes and loans payable, net of current portion

 

207,992

 

 

 

210,657

 

Other non-current liabilities

 

7,738

 

 

 

7,352

 

Total liabilities

 

418,832

 

 

 

394,874

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

   issued or outstanding

 

 

 

 

 

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

   72,280,952 shares issued and 54,114,090 shares outstanding on

   October 31, 2017 and 72,017,288 shares issued and 53,850,426 shares

   outstanding on April 30, 2017

 

72

 

 

 

72

 

Additional paid-in capital

 

248,918

 

 

 

245,865

 

Retained earnings

 

370,231

 

 

 

369,164

 

Accumulated other comprehensive income

 

585

 

 

 

436

 

Treasury stock, at cost (18,166,862 shares on October 31, 2017 and

   April 30, 2017)

 

(222,375

)

 

 

(222,375

)

Total stockholders’ equity

 

397,431

 

 

 

393,162

 

 

$

816,263

 

 

$

788,036

 

 

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

4


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended October 31,

 

 

For the Six Months Ended October 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In thousands, except per share data)

 

Net sales

 

$

148,427

 

 

$

233,528

 

 

$

277,448

 

 

$

440,479

 

Cost of sales

 

 

97,628

 

 

 

135,923

 

 

 

186,017

 

 

 

255,305

 

Gross profit

 

 

50,799

 

 

 

97,605

 

 

 

91,431

 

 

 

185,174

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,746

 

 

 

2,698

 

 

 

5,532

 

 

 

4,851

 

Selling and marketing

 

 

15,351

 

 

 

12,527

 

 

 

27,069

 

 

 

21,721

 

General and administrative

 

 

24,713

 

 

 

30,229

 

 

 

54,041

 

 

 

53,926

 

Total operating expenses

 

 

42,810

 

 

 

45,454

 

 

 

86,642

 

 

 

80,498

 

Operating income

 

 

7,989

 

 

 

52,151

 

 

 

4,789

 

 

 

104,676

 

Other (expense)/income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense)/income, net

 

 

(3

)

 

 

(30

)

 

 

1,295

 

 

 

(30

)

Interest expense, net

 

 

(2,963

)

 

 

(2,175

)

 

 

(5,354

)

 

 

(4,188

)

Total other (expense)/income, net

 

 

(2,966

)

 

 

(2,205

)

 

 

(4,059

)

 

 

(4,218

)

Income from operations before income taxes

 

 

5,023

 

 

 

49,946

 

 

 

730

 

 

 

100,458

 

Income tax expense/(benefit)

 

 

1,789

 

 

 

17,463

 

 

 

(337

)

 

 

32,752

 

Net income

 

 

3,234

 

 

 

32,483

 

 

 

1,067

 

 

 

67,706

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized income on interest rate

   swap

 

 

356

 

 

 

814

 

 

 

236

 

 

 

406

 

Other comprehensive income, before income taxes

 

 

356

 

 

 

814

 

 

 

236

 

 

 

406

 

Income tax expense on other comprehensive income

 

 

(128

)

 

 

(285

)

 

 

(87

)

 

 

(134

)

Other comprehensive income, net of tax

 

 

228

 

 

 

529

 

 

 

149

 

 

 

272

 

Comprehensive income

 

$

3,462

 

 

$

33,012

 

 

$

1,216

 

 

$

67,978

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

 

$

0.58

 

 

$

0.02

 

 

$

1.21

 

Diluted

 

$

0.06

 

 

$

0.57

 

 

$

0.02

 

 

$

1.18

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

54,044

 

 

 

56,231

 

 

 

53,975

 

 

 

56,140

 

Diluted

 

 

54,656

 

 

 

57,136

 

 

 

54,800

 

 

 

57,145

 

 

 

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

 

5


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Stockholders’

 

(In thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance at April 30, 2017

 

 

72,017

 

 

$

72

 

 

$

245,865

 

 

$

369,164

 

 

$

436

 

 

 

18,167

 

 

$

(222,375

)

 

$

393,162

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,179

 

Shares issued under employee stock

   purchase plan

 

 

82

 

 

 

 

 

 

1,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,058

 

Change in unrealized income on

   interest rate swap, net of tax effect

 

 

 

 

 

 

 

 

 

 

149

 

 

 

 

 

 

 

149

 

Issuance of common stock under

   restricted stock unit awards, net

   of shares surrendered

 

 

182

 

 

 

 

 

 

(2,184

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,184

)

Net income

 

 

 

 

 

 

 

 

 

 

1,067

 

 

 

 

 

 

 

 

 

 

 

 

1,067

 

Balance at October 31, 2017

 

 

72,281

 

 

$

72

 

 

$

248,918

 

 

$

370,231

 

 

$

585

 

 

 

18,167

 

 

$

(222,375

)

 

$

397,431

 

 

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

 

 

 

6


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Six Months Ended October 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

1,067

 

 

$

67,706

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

26,317

 

 

 

23,772

 

Loss on sale/disposition of assets

 

 

34

 

 

 

104

 

Provision for losses on accounts receivable

 

 

354

 

 

 

308

 

Change in contingent consideration

 

 

(1,300

)

 

 

 

Stock-based compensation expense

 

 

4,179

 

 

 

3,918

 

Changes in operating assets and liabilities (net effect of acquisitions):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

27,112

 

 

 

(3,538

)

Inventories

 

 

(42,581

)

 

 

(14,349

)

Prepaid expenses and other current assets

 

 

(1,362

)

 

 

(2,775

)

Income taxes

 

 

(1,133

)

 

 

(9,676

)

Accounts payable

 

 

(8,725

)

 

 

1,111

 

Accrued payroll and incentives

 

 

(11,640

)

 

 

(4,728

)

Accrued profit sharing

 

 

(10,399

)

 

 

(4,699

)

Accrued expenses

 

 

(13,084

)

 

 

4,235

 

Accrued warranty

 

 

262

 

 

 

116

 

Other assets

 

 

(362

)

 

 

(183

)

Other non-current liabilities

 

 

609

 

 

 

52

 

Net cash (used in)/provided by operating activities

 

 

(30,652

)

 

 

61,374

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(23,016

)

 

 

(178,059

)

Refunds on machinery and equipment

 

 

 

 

 

5,083

 

Receipts from note receivable

 

 

 

 

 

43

 

Payments to acquire patents and software

 

 

(254

)

 

 

(425

)

Proceeds from sale of property and equipment

 

 

6

 

 

 

 

Payments to acquire property and equipment

 

 

(9,863

)

 

 

(23,312

)

Net cash used in investing activities

 

 

(33,127

)

 

 

(196,670

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from loans and notes payable

 

 

75,000

 

 

 

50,000

 

Cash paid for debt issuance costs

 

 

 

 

 

(525

)

Payments on capital lease obligation

 

 

(323

)

 

 

(298

)

Payments on notes and loans payable

 

 

(3,150

)

 

 

(28,150

)

Proceeds from Economic Development Incentive Program

 

 

 

 

 

101

 

Proceeds from exercise of options to acquire common stock,

   including employee stock purchase plan

 

 

1,058

 

 

 

948

 

Payment of employee withholding tax related to restricted stock units

 

 

(2,184

)

 

 

(4,163

)

Net cash provided by financing activities

 

 

70,401

 

 

 

17,913

 

Net increase/(decrease) in cash and cash equivalents

 

 

6,622

 

 

 

(117,383

)

Cash and cash equivalents, beginning of period

 

 

61,549

 

 

 

191,279

 

Cash and cash equivalents, end of period

 

$

68,171

 

 

$

73,896

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

4,844

 

 

$

3,802

 

Income taxes

 

 

1,257

 

 

 

42,609

 

 

 

7


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Non-cash Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended October 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

 

$

2,013

 

 

$

3,082

 

 

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

 

 

 

8


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2017 and 2016

 

(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 market. We are also a leading provider of shooting, hunting, and rugged outdoor products and accessories, including knives and cutting tools, sighting lasers, shooting supplies, tree saws, and survival gear.

In our Firearms segment, we manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and muzzleloaders), handcuffs, and 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; Eagle, Idaho; and Deep River, Connecticut. We also sell our manufacturing services to other businesses under our Smith & Wesson and Deep River Plastics brands.

In our Outdoor Products & Accessories segment, we design, source, distribute, and manufacture reloading, gunsmithing, and gun cleaning supplies, high-quality stainless steel cutting tools and accessories, flashlights, tree saws and related trimming accessories, shooting supplies, rests, and other related accessories, apparel, vault accessories, laser grips and laser sights, and a full range of products for survival and emergency preparedness. We sell our outdoor products and accessories under the following brands: Caldwell, Wheeler, Tipton, Frankford Arsenal, Smith & Wesson, M&P, Thompson/Center, Lockdown, Hooyman, BOG-POD, Golden Rod, Non-Typical, Crimson Trace, Imperial, Schrade, Old Timer, Bubba Blade, UST, and KeyGear. We develop and market our outdoor products and accessories at our facilities in Columbia, Missouri; Wilsonville, Oregon; and Jacksonville, Florida.

On August 1, 2016, we acquired substantially all of the net assets of Taylor Brands, LLC; on August 26, 2016, we acquired all of the issued and outstanding stock of Crimson Trace Corporation; and on November 18, 2016, we acquired substantially all of the net assets of Ultimate Survival Technologies, Inc., in three separate transactions, which we refer to collectively as the 2017 Acquisitions.

On August 7, 2017, we acquired substantially all of the net assets of Gemini Technologies, Incorporated, or Gemtech, and on August 11, 2017, we acquired 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 3 – Acquisitions for more information regarding these transactions.

 

(2) Basis of Presentation:

Interim Financial Information – The condensed consolidated balance sheet as of October 31, 2017, the condensed consolidated statements of income and comprehensive income for the three and six months ended October 31, 2017 and 2016, the condensed consolidated statement of changes in stockholders’ equity for the six months ended October 31, 2017, and the condensed consolidated statements of cash flows for the six months ended October 31, 2017 and 2016 have been prepared by us without audit. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows at October 31, 2017 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2017 has been derived from our audited consolidated financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017. The results of operations for the three and six months ended October 31, 2017 may not be indicative of the results that may be expected for the year ending April 30, 2018, or any other period.

 

Recently Issued Accounting Standards – In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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. ASU 2014-09 is effective for interim reporting periods beginning December 15, 2017, and early adoption is permitted. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies the guidance relating to principal versus agent considerations. Additionally, in April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and

9


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2017 and 2016

 

licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain narrow areas and adds some practical expedients. We plan to adopt the new standard on May 1, 2018 utilizing one of two acceptable methods: full retrospective adoption for all periods presented or modified retrospective adoption that presents a cumulative effect as of the adoption date. We have established an internal project team and have engaged third party specialists to assist us in evaluating the impact these ASUs will have on our condensed consolidated financial statements. We have substantially completed the diagnostic review of a sample of existing baseline contracts to identify potential differences that would result from applying the requirements under the new standard. As of October 31, 2017, we are in the process of evaluating the application of the new standard and cannot at this time estimate the impact the new standard will have on our condensed consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory - Simplifying the Measurement of Inventory (Topic 330), or ASU 2015-11, which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined other than by the last-in first-out (LIFO) method and the retail inventory method. ASU 2015-11 is effective for periods beginning after December 15, 2016, and early adoption is permitted. The new guidance must be applied prospectively. We adopted ASU 2015-11 during the three months ended July 31, 2017. The impact on our condensed consolidated financial statements was not material.

 

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 lease assets and lease liabilities arising from operating leases in a classified balance sheet. The requirements of this ASU are effective for financial statements for annual periods beginning after December 15, 2018, and early adoption is permitted. We have begun to review lease contract information from our subsidiaries and are currently evaluating the impact that ASU 2016-02 will have on our condensed consolidated financial statements.  

 

(3) Acquisitions:

 

2018 Acquisitions

 

In August 2017, in two separate transactions, we acquired substantially all of the net assets of Gemtech and we acquired Bubba Blade branded products and other assets from Fish Tales, LLC for an aggregate purchase price of $23.0 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 projections, we believe it is unlikely that the acquired business will achieve the performance metrics. Therefore, as of October 31, 2017, the contingent liability was recorded at a fair value of $100,000 in non-current liabilities. Gemtech, based in Eagle, 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 sportsman knives and tools for fishing and hunting, including the premium knife brand Bubba Blade. The Gemtech business will be fully integrated into our Firearms segment and Bubba Blade branded products will be fully integrated into our Outdoor Products & Accessories segment. Therefore, we will not provide discrete financial information for the 2018 Acquisitions in the future.

 

We are in the process of finalizing the valuations of the assets acquired and liabilities assumed in the 2018 Acquisitions. Therefore, the fair values for these acquisitions are subject to further adjustments as we obtain additional information during the respective measurement periods, which will not exceed 12 months from the date of each acquisition. The 2018 Acquisitions will necessitate the use of this measurement period to adequately analyze and assess a number of factors used in establishing the asset and liability fair values as of each acquisition date, including the significant contractual and operational factors underlying the trade name, developed technology, and customer relationship intangible assets.

 

10


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2017 and 2016

 

The following table summarizes the estimated preliminary allocation of the purchase price for the 2018 Acquisitions (in thousands):

 

 

 

 

 

 

 

 

During the Three Months Ended

 

 

 

October 31, 2017

 

Accounts receivable

 

$

846

 

Inventories

 

 

4,683

 

Other current assets

 

 

145

 

Property, plant, and equipment

 

 

506

 

Intangibles

 

 

6,400

 

Goodwill

 

 

11,846

 

Total assets acquired

 

 

24,426

 

Accounts payable

 

 

1,261

 

Accrued payroll

 

 

49

 

Other long term liabilities

 

 

100

 

Total liabilities assumed

 

 

1,410

 

 

 

$

23,016

 

 

Included in general and administrative costs are $259,000 and $676,000 of acquisition-related costs incurred during the three and six months ended October 31, 2017, respectively, related to the 2018 Acquisitions.

 

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 average lives:

 

 

 

 

 

Weighted Average

 

 

 

Amount

 

 

Life (In years)

 

Developed technology

 

$

1,700

 

 

 

5.9

 

Customer relationships

 

 

1,600

 

 

 

5.2

 

Trade names

 

 

3,100

 

 

 

5.6

 

 

 

$

6,400

 

 

 

 

 

 

Pro forma results of operations assuming that the 2018 Acquisitions had occurred 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 substantially all of the net assets of Taylor Brands, LLC (now referred to as BTI Tools, LLC) and Ultimate Survival Technologies, Inc. (now referred to as Ultimate Survival Technologies, LLC, or UST,) as well as 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 UST, up to an additional $2.0 million may be paid over a period of two years, contingent upon the financial performance of the acquired business. The valuation of this contingent consideration liability was established in accordance with ASC 805 — Business Combinations. The initial fair value of this contingent consideration liability was $1.7 million. Based on the current forecasted revenue projections, during the six months ended October 31, 2017, we recorded a $1.3 million reduction in the fair value of this contingent consideration liability because we do not expect that the acquired business will achieve the performance metrics. This reduction was recorded in other income on the condensed consolidated statements of income. As of October 31, 2017, the fair value of this contingent liability was $400,000, which was recorded as a non-current liability.

 

We have substantially completed the valuation of the assets acquired and liabilities assumed related to the 2017 Acquisitions. During the six months ended October 31, 2017, we increased goodwill by $10.2 million, primarily as a result of changes to the valuation of customer relationship intangible assets and the impact to the value of the related deferred tax liabilities relating to the 2017 Acquisitions. As a result, we reduced amortization expense by $776,000, net of tax, during the three months ended October 31, 2017 relating to these changes.

11


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2017 and 2016

 

 

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

 

 

$

(200

)

 

$

11,435

 

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

 

 

 

10,096

 

 

 

102,897

 

Total assets acquired

 

 

242,217

 

 

 

(4,215

)

 

 

238,002

 

Accounts payable

 

 

6,214

 

 

 

18

 

 

 

6,232

 

Accrued expenses

 

 

973

 

 

 

158

 

 

 

1,131

 

Accrued payroll

 

 

1,500

 

 

 

(72

)

 

 

1,428

 

Accrued income taxes

 

 

6

 

 

 

(6

)

 

 

 

Accrued warranty

 

 

98

 

 

 

96

 

 

 

194

 

Deferred income taxes

 

 

20,658

 

 

 

(4,409

)

 

 

16,249

 

Total liabilities assumed

 

 

29,449

 

 

 

(4,215

)

 

 

25,234

 

 

 

$

212,768

 

 

$

 

 

$

212,768

 

 

Included in general and administrative costs are $1.8 million and $3.2 million of acquisition-related costs for the 2017 Acquisitions incurred during the three and six months ended October 31, 2016, respectively. The 2017 Acquisitions generated revenue of $27.1 million and $42.6 million for the three and six months ended October 31, 2017, respectively.

 

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

 

 

 

 

 

 

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 Three

 

 

For the Six

 

 

 

Months Ended

 

 

Months Ended

 

 

 

October 31, 2016

 

 

October 31, 2016

 

Net sales

 

$

241,021

 

 

$

470,114

 

Income from operations

 

 

55,045

 

 

 

106,533

 

Net income per share - diluted

 

 

0.63

 

 

 

1.26

 

 

 

The unaudited pro forma income from operations for the three and six months ended October 31, 2016 has been adjusted to reflect increased cost of goods sold from the fair value step-up in inventory, which is expensed over the first inventory cycle, and the amortization of intangibles and order backlog recorded as if the 2017 Acquisitions had occurred on May 1, 2015. The unaudited pro

12


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2017 and 2016

 

forma results are presented for informational purposes only and are 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.

 

(4) Goodwill:

 

The changes in the carrying amount of goodwill for the three and six months ended October 31, 2017 by reporting segment are as follows:

 

 

 

Firearms

 

 

Outdoor Products &

 

 

Total

 

 

 

Segment

 

 

Accessories Segment

 

 

Goodwill

 

Balance as of April 30, 2017

 

$

13,770

 

 

$

155,247

 

 

$

169,017

 

Adjustments

 

 

 

 

 

83

 

 

 

83

 

Balance as of July 31, 2017

 

 

13,770

 

 

 

155,330

 

 

 

169,100

 

Adjustments

 

 

 

 

 

10,152

 

 

 

10,152

 

Acquisitions

 

 

4,619

 

 

 

7,227

 

 

 

11,846

 

Balance as of October 31, 2017

 

$

18,389

 

 

$

172,709

 

 

$

191,098

 

 

Refer to Note 11 — Segment Information below for more detail.  

 

 

(5) Notes and Loans Payable:

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 $90.8 million was outstanding as of October 31, 2017. The Revolving Line provides for availability until October 27, 2021 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. We incurred $1.0 million of debt issuance costs related to the Credit Agreement, which are included in notes and loans payable in the accompanying condensed consolidated balance sheet.  On October 27, 2016, we entered into a second amendment to the Credit Agreement, or the Second Amendment, with the Lenders. Among other things, the Second Amendment increased the Revolving Line to $350.0 million, increased the option to expand the credit commitment to an additional $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 and loans payable in the condensed consolidated balance sheet.  

As of October 31, 2017, we had $125.0 million of borrowings outstanding on the Revolving Line, which bore interest at 2.99%, equal to the LIBOR rate plus an applicable margin. The Term Loan, which bears interest at a variable rate, 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 for the Term Loan will be due in full.

We were required to obtain fixed 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%). 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 October 31, 2017, our interest rate on the Term Loan was 3.31%.

As of October 31, 2017, the interest rate swap was considered effective and had no effect on earnings. The fair value of the interest rate swap on October 31, 2017 was an asset of $808,000 and was included in other assets on our condensed consolidated balance sheet. We do not expect the interest rate swap to have any material effect on earnings within the next 12 months.

5.000% Senior Notes – During fiscal 2015, we issued an aggregate of $75.0 million of 5.000% Senior Notes due 2018, or the 5.000% Senior Notes, to various institutional investors pursuant to the terms and conditions of an indenture, or the 5.000% Senior Notes Indenture, and purchase agreements. The 5.000% Senior Notes bear interest at a rate of 5.000% per annum payable on

13


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2017 and 2016

 

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 5.000% Senior Notes.

On and after July 15, 2017, we may, at our option, upon not less than 30 nor more than 60 days’ prior notice, redeem all or a portion of the 5.000% Senior Notes at a redemption price of 100% of the principal amount of the 5.000% 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 5.000% Senior Notes from the holders of the 5.000% 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 5.000% Senior Notes mature on July 15, 2018.

The 5.000% Senior Notes are general, unsecured obligations of our company. The 5.000% 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 5.000% 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 5.000% Senior Notes Indenture, or the 5.000% Senior Notes Lifetime Aggregate Limit. In addition, the 5.000% Senior Notes Indenture provides for other exceptions to the restricted payments covenant, each of which are independent of the 5.000% 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 5.000% Senior Notes in an aggregate amount not to exceed $75.0 million.

The limitation on indebtedness in the 5.000% Senior Notes Indenture is only applicable at such time that the consolidated coverage ratio (as set forth in the 5.000% Senior Notes Indenture) for us and our restricted subsidiaries is less than 3.00 to 1.00. In general, as set forth in the 5.000% Senior Notes Indenture, the consolidated coverage ratio is determined by comparing our prior four quarters’ consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) to our consolidated interest expense. The carrying value of our 5.000% Senior Notes as of October 31, 2017 approximates fair value in considering Level 2 inputs within the hierarchy.

The Credit Agreement for our credit facility contains financial covenants relating to maintaining maximum leverage and minimum debt service coverage. The 5.000% Senior Notes Indenture contains a financial covenant relating to times interest earned.

Letters of Credit – At October 31, 2017, we had outstanding letters of credit under our credit facility aggregating $1.0 million.

(6) 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 condensed 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 $68.2 million and $61.5 million as of October 31, 2017 and April 30, 2017, respectively. We utilized Level 1 of the value hierarchy to determine the fair values of these assets.

14


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2017 and 2016

 

Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

quoted prices for identical or similar assets or liabilities in non-active markets (such as corporate and municipal bonds that 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 October 31, 2017, in considering Level 2 inputs within the hierarchy. The fair value of our 5.000% Senior Notes as of October 31, 2017 approximated the carrying value in considering Level 2 inputs within the hierarchy as the 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, is classified within Level 2 of the valuation hierarchy. For more information regarding the interest rate swap, refer to Note 5 — Notes and Loans Payable.

Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our assumptions about the assumptions a market participant would use in pricing the asset or liability.

The acquisition-related contingent consideration liability represents the estimated fair value of additional future earn-outs payable for acquisitions of businesses that included earn-out clauses. The valuation of the contingent consideration will be evaluated on an ongoing basis and is based on management estimates and entity-specific assumptions which are considered Level 3 inputs.

In connection with the purchase of UST, up to an additional $2.0 million may be paid over a period of two years, contingent upon the financial performance of the acquired business. The valuation of this contingent consideration liability was established in accordance with ASC 805 — Business Combinations. The initial fair value of this contingent consideration liability was $1.7 million. Based on the current forecasted revenue projections, during the six months ended October 31, 2017, we recorded a $1.3 million reduction in the fair value of this contingent consideration liability because we do not expect that the acquired business will achieve the performance metrics. This reduction was recorded in other income on the condensed consolidated statements of income. As of October 31, 2017, the fair value of this contingent liability was $400,000, which was recorded as a non-current liability.

In connection with the Gemtech acquisition, up to a maximum of $17.1 million may be paid contingent upon the cumulative three year sales volume of the acquired business. The valuation of this contingent consideration liability was established in accordance with ASC 805 — Business Combinations. Based on current forecasted revenue projections, we believe it is unlikely that the acquired business will achieve the performance metrics. Therefore, as of October 31, 2017, the contingent liability was recorded at a fair value of $100,000 in non-current liabilities.

 

(7) Inventories:

The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or net realizable value, as of October 31, 2017 and April 30, 2017 (in thousands):

 

 

 

October 31, 2017

 

 

April 30, 2017

 

Finished goods (a)

 

$

111,428

 

 

$

61,080

 

Finished parts

 

 

46,371

 

 

 

51,177

 

Work in process

 

 

8,057

 

 

 

9,379

 

Raw material

 

 

13,090

 

 

 

10,046

 

Total inventories

 

$

178,946

 

 

$

131,682

 

 

(a) The increase in finished goods inventory was primarily related to our Firearms segment.

15


AMERICAN OUTDOORS BRANDS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2017 and 2016

 

(8) Intangible Assets:

 

The following table presents a summary of intangible assets as of October 31, 2017 and April 30, 2017 (in thousands):

 

 

 

October 31, 2017

 

 

April 30, 2017

 

 

 

Gross