(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands except per share data and unless otherwise indicated)
Forward-Looking Information is Subject to Risk and Uncertainty
Some of the statements made and information contained in this report, excluding historical information, are "forward-looking statements," including those that discuss, among other things: our plans, objectives, expectations, intentions, strategies, goals, outlook or other non-historical matters; projections with respect to future revenues, income, earnings per share or other financial measures for Vista Outdoor; and the assumptions that underlie these matters. The words "believe," "expect," "anticipate," "intend," "aim," "should" and similar expressions are intended to identify such forward-looking statements. To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995. Numerous risks, uncertainties and other factors could cause our actual results to differ materially from the expectations described in such forward-looking statements, including the following:
supplier capacity constraints, production or shipping disruptions or quality or price issues affecting our operating costs;
the supply, availability and costs of raw materials and components;
increases in commodity, energy, and production costs;
seasonality and weather conditions;
our ability to complete acquisitions, realize expected benefits from acquisitions and integrate acquired businesses;
reductions in or unexpected changes in or our inability to accurately forecast demand for ammunition, accessories, or other outdoor sports and recreation products;
disruption in the service or significant increase in the cost of our primary delivery and shipping services for our products and components or a significant disruption at shipping ports;
risks associated with diversification into new international and commercial markets, including regulatory compliance;
our ability to take advantage of growth opportunities in international and commercial markets;
our ability to obtain and maintain licenses to third-party technology;
our ability to attract and retain key personnel;
disruptions caused by catastrophic events;
risks associated with our sales to significant retail customers, including unexpected cancellations, delays, and other changes to purchase orders;
our competitive environment;
our ability to adapt our products to changes in technology, the marketplace and customer preferences, including our ability to respond to shifting preferences of the end consumer from brick and mortar retail to online retail;
our ability to maintain and enhance brand recognition and reputation;
others' use of social media to disseminate negative commentary about us, our products, and boycotts;
the outcome of contingencies, including with respect to litigation and other proceedings relating to intellectual property, product liability, warranty liability, personal injury, and environmental remediation;
our ability to comply with extensive federal, state and international laws, rules and regulations;
changes in laws, rules and regulations relating to our business, such as federal and state ammunition regulations;
risks associated with cybersecurity and other industrial and physical security threats;
interest rate risk;
changes in the current tariff structures;
changes in tax rules or pronouncements;
capital market volatility and the availability of financing;
foreign currency exchange rates and fluctuations in those rates;
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general economic and business conditions in the United States and our markets outside the United States, including the war in Ukraine and the imposition of sanctions on Russia, conditions affecting employment levels, consumer confidence and spending, conditions in the retail environment, and other economic conditions affecting demand for our products and the financial health of our customers; and
risks related to our Planned Separation.
You are cautioned not to place undue reliance on any forward-looking statements we make. A more detailed description of risk factors that may affect our operating results can be found in Part 1, Item 1A, Risk Factors, of our Annual Report on Form 10-K for fiscal year 2022 and in the filings we make with Securities and Exchange Commission (the "SEC") from time to time. We undertake no obligation to update any forward-looking statements, except as otherwise required by law.
Business and Products
We serve the outdoor sports and recreation markets through a diverse portfolio of well-recognized brands that provide consumers with a wide range of performance-driven, high-quality, and innovative products. Our broad range of consumers include outdoor enthusiasts, hunters and recreational shooters, athletes, as well as law enforcement and military professionals. We sell our products through a wide variety of mass, specialty and independent retailers and distributors, such as Academy, Amazon, Bass Pro Shops/Cabela's, Dick's Sporting Goods, Kiesler Police Supply, Nations Best Sports, Sports Inc., Sports South, Sportsman's Warehouse, Target, and Walmart. Some of our products are also sold directly to consumers through the relevant brand's website. We have a scalable, integrated portfolio of brands that allows us to leverage our deep customer knowledge, product development and innovation, supply chain and distribution, and sales and marketing functions across product categories to better serve our retail partners and consumers.
Reportable Segments and Products
We operate under seven operating segments, which have been aggregated into two reportable segments, Sporting Products and Outdoor Products.
Our Sporting Products reportable segment designs, develops, distributes and manufactures ammunition, primers, components and related equipment and accessories and serves devoted hunters, recreational shooters, federal and local law enforcement agencies and the military. Ammunition products include pistol, rifle, rimfire, shotshell ammunition and primers. Our Sporting Products reportable segment consists of our Ammunition operating segment, which includes our ammunition-related businesses, including Federal, Remington, CCI, Speer, and HEVI-Shot.
Our Outdoor Products reportable segment designs, develops, distributes and manufactures gear and equipment to enhance the outdoor experiences of a wide variety of end users, including hunters, hikers, campers, cyclists, skiers, snowboarders, and golfers. Products from the businesses included in this reportable segment include hunting and shooting accessories, personal hydration solutions, outdoor cooking solutions, action sports helmets and goggles, footwear and cycling accessories, eBikes, audio speakers for outdoor sports, golf GPS devices, laser rangefinders, and golf launch monitors and simulators. Our Outdoor Products reportable segment consists of:
Our Outdoor Accessories operating segment, which includes our Bushnell Optics, Primos, RCBS, BlackHawk!, and Eagle businesses;
Our Sports Protection operating segment, which includes our Bell and Giro businesses;
Our Cycling operating segment, which is comprised of our QuietKat business;
Our Outdoor Cooking operating segment, which includes our Camp Chef and Fiber Energy businesses;
Our Hydration operating segment, which is comprised of our CamelBak business; and
Our Golf operating segment, which includes our Bushnell Golf and Foresight businesses.
Planned Separation of Outdoor Products and Sporting Products
On May 5, 2022, we announced that our Board of Directors has unanimously approved preparations for the separation of our Outdoor Products and Sporting Products reportable segments into two independent, publicly-traded companies. We anticipate that the transaction will be in the form of a distribution to our shareholders of 100% of the stock of Outdoor Products, which will become a new, independent publicly traded company. The distribution is intended to be tax-free to U.S. shareholders for U.S. federal income tax purposes. We currently expect the transaction will be completed in calendar year 2023, subject to final approval by our Board of Directors, a Form 10 registration statement being declared effective by the U.S. Securities and Table of Contents
Exchange Commission, regulatory approvals and satisfaction of other conditions. There can be no assurance regarding the ultimate timing of the proposed transaction or that the transaction will be completed.
We expect that the Planned Separation will create a number of benefits for Outdoor Products and Sporting Products, including:
Enhanced strategic focus with supporting resources: Each company will have enhanced strategic focus with resources to support its specific operational needs and growth drivers.
Tailored capital allocation priorities: Each company will have a tailored capital allocation philosophy that is better suited to support its distinctive business model and long-term goals.
Strengthened ability to attract and retain top talent: Each company will benefit from enhanced ability to attract and retain top talent that is ideally suited to execute its strategic and operational objectives.
Compelling value for shareholders: Each company will present a differentiated and compelling investment opportunity based on its particular business model.
Expanded strategic opportunities: Improved focus will allow Outdoor Products to further cement its reputation as the acquirer of choice through continued M&A in the outdoor recreation products marketplace and enable Sporting Products to secure attractive partnerships with other manufacturers.
We had a strong performance for the first quarter of fiscal year 2023. Financial highlights and notable events for the three months ended June 26, 2022 included the following:
Net sales increased $139,700, or 21.1%, over the comparable quarter last year.
Sporting Products net sales increased $146,339, or 40.2%.
Outdoor Products net sales decreased $6,639, or 2.2%.
Gross profit increased $52,043, or 21.6%, as compared to the same period last year. Gross profit margin increased to 36.6%, an increase of 15 basis points over the comparable quarter last year.
Sporting Products gross profit increased $51,966, or 34.9%.
Outdoor Products gross profit decreased $307, or 0.3%.
EBIT increased $28,769, or 20%, for the three months ended June 26, 2022 as compared to the three months ended June 27, 2021. EBIT margin decreased to 21.5%, a decrease of 19 basis points over the comparable quarter last year.
Net income increased to $126,015, or $2.16 per diluted share, compared to net income of $102,725, or $1.71 per diluted share for the comparable quarter last year.
Sporting Products Industry
Sales of hunting and shooting-sports related products, including ammunition, are heavily influenced by hunting and recreational shooting participation rates, civil unrest and the political environment. We believe that long-term participation trends support our expectation of continued increased demand for hunting and shooting-sports related products. Participation rates have remained strong, and we are seeing an expanded demographic of users. This broadened end consumer base has resulted in a much larger total addressable market opportunity for the industry and for our company. We believe we are well-positioned to succeed and capitalize on this demand given our scale and global operating platform, which we believe is particularly difficult to replicate in the highly regulated and capital-intensive ammunition manufacturing sector.
Outdoor Recreation Industry
We believe that long-term outdoor participation trends combined with a larger base of participants supports our expectation of continued increased demand for the innovative outdoor recreation-related products produced by our Outdoor Products brands. Rising inflation and the absence of stimulus payments have had an impact on the opening price points of certain categories. However, outdoor participation trends and demand for premium price points remain strong across our brand portfolio. We believe that demand for our Outdoor Products is being temporarily impacted by higher inflation causing a contraction in disposable income. Our Outdoor Products brands hold a strong competitive position in the marketplace, and we intend to further differentiate our brands through focused research and development and marketing investments including
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increased use of social media and other digital marketing. Following significant investments in our brands' e-commerce capabilities, both directly and through our E-Commerce Center of Excellence, we believe our brands are well-positioned to benefit from the ongoing shift in consumer shopping behavior to utilize online channels.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on results of operations, our financial condition, liquidity, and certain other factors that may affect our future results. The following information should be read in conjunction with our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Results of Operations Segment results for the three months ended June 26, 2022 compared to the three months ended June 27, 2021 The Company's net sales, gross profit, and EBIT by reportable segment and by corporate and other (where applicable) are presented below (dollars in thousands): Three months ended Change Net Sales: June 26, 2022 June 27, 2021 (1) Dollars Percent Sporting Products $ 510,626 $ 364,287 $ 146,339 40.2 % Outdoor Products 291,986 298,625 (6,639) (2.2) % Total net sales $ 802,612 $ 662,912 $ 139,700 21.1 %
(1) We modified the structure of our reportable segments during the third quarter of fiscal 2022. Accordingly, prior period amounts have been reclassified to conform with the current period presentation. See Note 17, Operating Segment Information, to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Sporting Products- The increase in sales was driven by increased volume due to timing of shipments to fill large commercial orders and improved pricing.
Outdoor Products- The decrease in sales was caused by reduced purchasing from big box retailers and prior year channel inventory fill in our Outdoor Accessories, Outdoor Cooking, and Action Sports businesses. Partially offsetting these declines were sales from businesses acquired in the prior fiscal year and strong demand in the independent dealer channels.
Three months ended Change Gross Profit: June 26, 2022 June 27, 2021 (1) Dollars Percent Sporting Products $ 200,962 $ 148,996 $ 51,966 34.9 % Outdoor Products 92,508 92,815 (307) (0.3) % Corporate and other - (384) 384 - % Total gross profit $ 293,470 $ 241,427 $ 52,043 21.6 % Gross profit margin 36.6% 36.4%
Sporting Products-The increase in gross profit was driven by sales volume and improved pricing, These increases were partially offset by increased commodity and input costs. Gross profit margin was 39.4% compared to 40.9% in the prior year quarter.
Outdoor Products-The decrease in gross profit was primarily caused by increased costs and lower volume as discussed above. These decreases were partially offset by gross profit from acquisitions that occurred during the prior fiscal year. Gross profit margin was 31.7% compared to 31.1% in the prior year quarter.
Corporate and Other-The increase in corporate gross profit was due to inventory step-up expenses in the prior year quarter.
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Three months ended Change EBIT: June 26, 2022 June 27, 2021 (1) Dollars Percent Sporting Products $ 176,086 $ 124,704 $ 51,382 41.2 % Outdoor Products 27,686 42,945 (15,259) (35.5) % Corporate and other (31,347) (23,993) (7,354) (30.7) % Total EBIT $ 172,425 $ 143,656 $ 28,769 20.0 % EBIT margin 21.5% 21.7%
Sporting Products-The increase in EBIT was primarily driven by the increase in gross profit. EBIT margin was 34.5% compared to 34.2% in the prior year quarter.
Outdoor Products-The decrease in EBIT was primarily caused by selling, general, and administrative costs in our prior year acquisitions. EBIT margin was 9.5% compared to 14.4% in the prior year quarter.
Corporate and Other-The decrease in EBIT was primarily caused by increased transaction, transition, and post-acquisition compensation.
For the three months ended June 26, 2022, the increase in interest expense is due to our higher average debt balance and borrowings under the 2021 ABL Revolving Credit Facility.
Three months ended Effective Effective Income tax provision: June 26, 2022 Rate June 27, 2021 Rate $ Change Corporate and other $ (40,100) 24.1 % $ (35,253) 25.5 % $ (4,847)
See Note 15, Income Taxes, to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding income taxes.
The decrease in the effective rate for the three-month period ending June 26, 2022 from the prior year three-month period is primarily driven by the impact of beneficial state tax law changes and a decrease in uncertain tax position reserves.
Cash increased to $36,612 at June 26, 2022 compared to $22,584 at March 31, 2022, primarily due to cash provided by operating activities which was partially offset by payments on the ABL Revolving Credit Facility.
Cash provided by operating activities increased $78,805 in the three months ended June 26, 2022 compared to the prior year quarter. Timing of vendor and post-acquisition compensation payments, increased net income, and decreased inventory growth, contributed to the increase. These increases were partially offset by higher accounts receivable due to higher sales volumes and timing of compensation payments as compared to the prior year quarter.
Cash used for investing activities decreased $10,491 for the three months ended June 26, 2022 compared to the prior-year quarter. The change was driven by a decrease in the acquisition of businesses.
Cash used for financing activities increased by $40,768 for the three months ended June 26, 2022 compared to the prior year quarter. The increase is due to additional payments on the ABL Revolving Credit Facility, and partially offset by a reduction in the repurchase of treasury shares as compared the prior year quarter.
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Liquidity and Capital Resources
In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, debt repayments, employee benefit obligations, share repurchases, and any strategic acquisitions. Our short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain production facilities and working capital requirements. Our debt service requirements over the next two years consist of required interest payments due under our 4.5% Notes and 2021 ABL Revolving Credit Facility.
Based on our current financial condition, management believes that our cash position, combined with anticipated generation of cash flows and the availability of funding, if needed, under our 2021 ABL Revolving Credit Facility, access to debt and equity markets, as well as other potential sources of funding including additional bank financing, will be adequate to fund future growth to service our currently anticipated long-term debt and pension obligations, make capital expenditures, and fund the 2022 Share Repurchase Program over the next 12 months. As of June 26, 2022, based on the borrowing base less outstanding borrowings of $90,000, outstanding letters of credit of $15,445, and minimum required borrowing base of $45,000, the amount available under the 2021 ABL Revolving Credit Facility was $299,555. Our total debt as a percentage of total capitalization (total debt and stockholders' equity) was 32.1% as of June 26, 2022. Subsequent to quarter end, we entered into a definitive Share Purchase Agreement with Fox and a definitive Agreement and Plan of Merger with Simms. We intend to fund the acquisitions through a combination of a $600,000 Credit Facility, that will replace our current 2021 ABL Revolving Credit Facility, and a $350,000 secured term loan facility. See Note 18, Subsequent Event, to the unaudited condensed consolidated financial statements, in Part I, Item 1 of this Quarterly Report on Form 10Q, which is incorporated herein by this reference.
There can be no assurance that the cost or availability of future borrowings, if any, will not be materially impacted by capital market conditions, including any disruptions to capital markets as a result of the COVID-19 pandemic (including the emergence and spread of vaccine resistant coronavirus variants), the military conflict in Ukraine and imposition of sanctions on Russia, or our future financial condition and performance. Furthermore, because our 2021 ABL Revolving Credit Facility is secured in large part by receivables from our customers, a sustained deterioration in general economic conditions, including as a result of the COVID-19 pandemic (including the emergence and spread of vaccine resistant coronavirus variants) or the military conflict in Ukraine and imposition of sanctions on Russia, that adversely affects the creditworthiness of our customers could have a negative effect on our future available liquidity under the 2021 ABL Revolving Credit Facility
Additional information about our 2021 ABL Revolving Credit Facility, and long-term debt is presented in Note 13, Long-term Debt, to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by this reference.
Contractual Obligations and Commitments
The Company leases certain warehouse, distribution and office facilities, vehicles and office equipment under operating leases. As of June 26, 2022, current and long-term operating lease liabilities of $11,582 and $77,827, respectively, were recorded in the accompanying unaudited condensed consolidated balance sheets. For further discussion on minimum lease payment obligations, see Note 3, Leases, to the unaudited condensed consolidated financial statements in Part I, Item 1 of this report.
There have been no material changes with respect to the contractual obligations and commitments or off-balance sheet arrangements described in our Annual Report on Form 10-K for fiscal year 2022.
From time-to-time, we are subject to various legal proceedings, including lawsuits, which arise out of and are incidental to, the conduct of our business. We do not consider any of such proceedings that are currently pending, individually or in the aggregate, to be material to our business or likely to result in a material adverse effect on our operating results, financial condition, or cash flows.
Our operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations, as well as applicable foreign laws and regulations, including those governing the discharge of hazardous materials, remediation of contaminated sites, and restoration of damage to the environment. We are obligated to conduct investigations and/or remediation activities at certain sites that we own or operate or formerly owned or operated.
Certain of our former subsidiaries have been identified as potentially responsible parties ("PRPs"), along with other parties, in regulatory agency actions associated with hazardous waste sites. As a PRP, those former subsidiaries may be
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required to pay a share of the costs of the investigation and clean-up of these sites. In that event, we would be obligated to indemnify those subsidiaries for those costs. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we do not currently expect that these potential liabilities, individually or in the aggregate, will have a material adverse effect on our operating results, financial condition, or cash flows.
We could incur substantial additional costs, including cleanup costs, resource restoration, fines, and penalties or third-party property damage or personal injury claims, as a result of violations or liabilities under environmental laws or non-compliance with environmental permits. While environmental laws and regulations have not had a material adverse effect on our operating results, financial condition, or cash flows in the past, and we have environmental management programs in place to mitigate these risks, it is difficult to predict whether they will have a material impact in the future.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Annual Report on Form 10-K for fiscal year 2022.
Dependence on Key Customers; Concentration of Credit
No single customer contributed 10% or more of our sales in the three months . . .
Jul 28, 2022
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