Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ý | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2016 |
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OR |
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 1-36597
Vista Outdoor Inc.
(Exact name of Registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) | | 47-1016855 (I.R.S. Employer Identification No.) |
262 N University Avenue | | |
Farmington, UT | | 84025 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: (801) 447-3000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Name of each exchange on which registered |
Common Stock, par value $.01 | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None.
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý No o
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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer ý | | Accelerated Filer o | | Non-Accelerated Filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of October 4, 2015 the aggregate market value of the registrant's voting common stock held by non-affiliates was approximately $2.732 billion (based upon the closing price of the common stock on the New York Stock Exchange on October 2, 2015).
As of May 16, 2016, there were 60,732,574 shares of the registrant's voting common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
Certain business terms used in this document are defined in the “Glossary and Acronyms” found at the end of this section, and should be read in conjunction with our consolidated and combined financial statements included in this report.
On April 1, 2016, we completed the acquisition of BRG Sports Inc.’s Action Sports division ("Action Sports"), operated by Bell Sports Corp. The acquisition includes the market-leading brands Bell and Giro. Under the terms of the transaction, we paid $400,000, subject to customary working capital adjustments, and additional contingent consideration payable if incremental profitability growth milestones within the Bell Powersports product line are achieved. The Action Sports brands are product category leaders, best-in-class innovators and industry pioneers in premium protective gear and related accessories. The Action Sports brands set the standard for innovation and excellence in cycling, snow sports, action sports and powersports. Action Sports remains headquartered in Scotts Valley, California and operates facilities in the U.S., Canada, Europe and Asia. The acquisition of Action Sports includes more than 600 employees worldwide. The acquisition of Action Sports occurred after the end of our fiscal 2016 and is not presented in the description of our business or the financial information provided throughout.
Our Company
Vista Outdoor is a leading global designer, manufacturer and marketer of consumer products in the growing outdoor sports and recreation markets. Vista Outdoor operates in two segments, Shooting Sports and Outdoor Products. Vista Outdoor is headquartered in Farmington, Utah and has manufacturing operations and facilities in 11 U.S. States, Canada, Mexico and Puerto Rico along with international sales and sourcing operations in Asia, Australia, Canada, Europe, and New Zealand. Vista Outdoor was incorporated in Delaware in 2014.
We serve the outdoor sports and recreation markets through a diverse portfolio of over 40 well-recognized brands that provide consumers with a wide range of performance-driven, high-quality and innovative products, including sporting ammunition and firearms, outdoor accessories, outdoor sports optics, golf rangefinders, performance eyewear, hydration products, and stand up paddle boards. We serve a broad range of end consumers, including outdoor enthusiasts, hunters and recreational shooters, athletes, as well as law enforcement and military professionals. Our products are sold through a wide variety of mass, specialty and independent retailers, such as Bass Pro Shops, Cabela's, Dick's Sporting Goods, Gander Mountain, Recreational Equipment, Inc., Sportsman's Warehouse, Target and Walmart. We also sell certain of our products 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 end users.
Many of our brands have a rich, long-standing heritage, such as Federal Premium, founded in 1922, and Bushnell, founded in 1948. We believe this brand heritage supports our leading market share positions in multiple categories. For example, we believe we hold the No. 1 sales position in the U.S. markets for ammunition, riflescopes, golf rangefinders, and hydration packs/bottles. To maintain the strength of our brands and drive revenue growth, we invest in product innovation to improve performance, quality and affordability while providing world-class customer support to leading retail partners and end users. We have received numerous awards for product innovation by respected industry publications and for service from our retail customers. Additionally, high-profile professional sportsmen and athletes use and endorse our products, which influences the purchasing behavior of recreational consumers.
Our brands in the shooting sports and outdoor products markets include the following:
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Shooting Sports | | Outdoor Products |
American Eagle | | Alliant Powder | | Hoppe's |
Blazer | | Bee Stinger | | Jimmy Styks |
CCI | | BLACKHAWK! | | M-Pro 7 |
Estate Cartridge | | Bollé | | Millett |
Federal Premium | | Bushnell | | Night Optics |
Force on Force | | Butler Creek | | Outers |
Fusion | | CamelBak | | Primos |
Independence | | Cébé | | RCBS |
Savage Arms | | Champion Target | | Redfield |
Savage Range Systems | | Eagle | | Serengeti |
Speer | | Final Approach | | Simmons |
Stevens | | Gold Tip | | Stoney Point |
| | GunMate | | Tasco |
| | Gunslick Pro | | Uncle Mike's |
| | | | Weaver |
We have approximately 5,800 employees across four continents. We also source finished product both domestically and internationally for global distribution. Our supply chain and logistics infrastructure gives us the ability to serve a broad array of wholesale and retail customers, many of whom rely on us for services such as category management, marketing campaigns, merchandising and inventory replenishment. Our strong wholesale and retail relationships and diverse product offering provide a unique competitive advantage that enhances our growth opportunities, provides sales stability and supports high levels of profitability.
Market Opportunity
We participate in the global market for consumer goods geared toward outdoor recreation and shooting sports. Spending on outdoor recreation products in the U.S., including the purchase of gear for bicycling, camping, fishing, hunting, motorcycling, off-roading, snow sports, trail sports, water sports and wildlife viewing, totaled $48 billion in 2011, according to the 2012 Outdoor Recreation Economy National Report issued by the Outdoor Industry Association, which publishes data every five years. Examples of the sports and activities we target include archery, bird watching, camping, cycling, golf, hiking, hunting, paddle boarding, snow skiing, and target shooting. We believe the sporting goods and outdoor recreation sectors are lucrative global markets with the potential for sustained future growth. We believe a greater awareness of, and participation in, outdoor sports and recreation has been a principal driver of this growth. We believe growth will continue, driven by positive shifts in consumer demographics utilizing our products, including increases in new, female and younger participants, and expanding interest in outdoor sports and shooting activities.
Outdoor Recreation and Accessories Industry
The outdoor recreation and accessories industry represents a large and growing focus area of our business. Examples of activities in this industry include archery, camping and hiking, cycling, fishing, golf, rock climbing, water sports, wildlife watching, and winter sports. Our consumers often participate in more than one of these activities. We believe the fragmented nature of the outdoor recreation industry, combined with retail and consumer overlap with our existing businesses, present attractive growth opportunities, both organically and through strategic acquisitions.
Shooting Sports Industry
Shooting sports products currently represent the largest proportion of our sales. We design, develop, manufacture, and source ammunition, long guns and related equipment products. Among these categories, we derive the largest portion of our sales from ammunition, which is a consumable, repeat purchase product. During fiscal 2014 and early 2015 firearms and ammunition sales experienced a decline. However, in recent months, overall NICS checks increased and we believe the market for both firearms and ammunition is stabilizing. We believe we are well-positioned to succeed in the shooting sports market,
given our scale and global operating platform, which we believe is difficult to replicate in the highly regulated and capital intensive ammunition manufacturing sector.
Competitive Strengths
Portfolio of Authentic Brands Focused on Outdoor Sports and Recreation
We have a diverse portfolio of outdoor sports and recreation and shooting sports brands, many with long-standing, market leading positions. We seek to maintain our brand strength by developing performance-enhancing innovations, introducing new products, engaging in product and brand marketing campaigns, and providing marketing support to our strategic channel partners. We target selling prices that balance our premium positioning with our focus on affordability to capture a large consumer base. Our brand strength and product innovations allow us to drive sales growth and deliver robust profit margins.
We employ a segmented brand strategy that leverages over 40 brands that are leaders in niche categories. This approach provides us with several competitive advantages:
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• | Strong brand recognition, with the ability to command a leading market share position across several categories. For example: |
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◦ | Federal Premium ammunition brand has a No. 1 market share in ammunition, |
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◦ | Savage Arms is a nationally recognized long gun brand among hunters and recreational shooters who desire quality at an affordable price, |
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◦ | Bushnell brand has a No. 1 market share in binoculars and golf rangefinders, |
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◦ | CamelBak is the leading provider of hydration system solutions for individuals in the hiking, cycling, and winter sports markets, |
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◦ | BLACKHAWK! is an industry leader in tactical accessories with a customer base that ranges from individual shooting enthusiasts to government customers who depend on its performance and durability, |
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◦ | Hoppe's brand has a No. 1 market share in gun cleaning solutions and accessories. |
• Better insight into consumer preferences and market dynamics through information sharing across our portfolio. For example, our strategic relationships with key accounts combined with our world-class customer service model deliver consumer insights into our aligned product development organization and process. This information helps us develop and maintain a robust new product pipeline.
• "Good, better, best" strategy using multiple brands. For example, our Bushnell Elite products target consumers seeking high-end products.
• Increased presence and shelf space in our core retail channels. We are able to command more shelf space by offering a wide variety of brands.
Leading Innovation and Product Development Competencies
We believe our product development capabilities and intellectual property portfolio provide us with a strong competitive advantage. By applying our engineering and manufacturing expertise, we have been able to bring to market new and innovative products that maintain product differentiation while targeting affordability for our end consumers.
We have continuously invested in research and development (R&D) and made disciplined investments in new technology to deliver sustainable growth and satisfy the evolving needs of our customers. We have leveraged our scale to develop a sophisticated R&D business process that we believe is difficult to replicate. Our current intellectual property portfolio includes over 500 patents, providing us with valuable proprietary trade secrets and technological know-how that we share across our platform. We employ approximately 100 dedicated design and product development professionals across the organization. Recent examples of our innovative, market-leading products include:
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• | American Eagle Syntech ammunition has a complete polymer coating that takes the place of the copper jacket in conventional target ammunition, eliminating metal-on-metal contact in the barrel. The result is smoother shooting and less friction, heat and barrel wear. |
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• | The new Savage Arms A22 Magnum is based on the A17 Semi-Automatic released in 2015 and named Guns and Ammo magazine's 2015 Rifle of the Year. The A22 features the same delayed blow back action as the A17. |
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• | The new Low Rider collection of mountain bike packs was released in 2015 and won the Enduro magazine's Design & Innovation award for the Skyline pack. The collection is focused on maximizing stability and a lower center of gravity for the rider. |
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• | The new Tour V4 family of golf rangefinders was unveiled at the PGA Show. The new Tour V4 and Tour V4 Slope edition are faster than their predecessor, 30% smaller, and increase the ease and accuracy in acquiring yardages. |
Proven Manufacturing, Global Sourcing and Distribution Platform
We believe our state-of-the-art manufacturing expertise, leading sourcing and distribution capabilities, and high-quality retail, wholesale and distributor networks allow us to produce, deliver and replenish products in a more efficient and faster manner than our competitors. We believe this allows us to better meet the needs of our customers and end users. We operate 13 manufacturing facilities in the United States, Puerto Rico, Mexico and Canada. A large portion of our manufacturing requires rigorous adherence to regulatory standards and certification. These regulations provide high barriers to entry as they require significant capital investments and lengthy government approval processes to manufacture many of our high-volume products. Further, we believe that we leverage the scale and scope of our manufacturing operations to be the low-cost producer of many of our products.
Our business model incorporates strategic deployment and alignment of the company's key objectives and goals, which include stringent operational metrics to drive year-over-year quality improvements, on-time delivery and operating efficiencies. We maintain a disciplined quality process and oversight to drive bottom line results and meet customer expectations. Additionally, our customer service model collects and incorporates consumer insight data, providing quality improvement opportunities.
Integrated supply chain management is core to our company. We procure large quantities of raw materials for our manufacturing operations and we use effective negotiating disciplines and production methods, with the objective of obtaining the best price and delivery available as well as low-cost conversion of raw materials into finished product. We also source finished product both domestically and internationally for global distribution. We continuously seek to improve our vendor base as well as our in-country support and oversight and, through our integrated supply chain management process, we seek to provide year-over-year reductions in product costs. We believe the scope and scale of our sourcing network is not easily replicated.
We have a global presence, selling goods through our distribution network in North America, South America, Europe, Asia and Australia. We continue to leverage and enhance the scale and automation of our consolidated North American distribution centers to decrease overall distribution costs.
We maintain positive relationships with our retail partners based on trust and professionalism. Our long-standing commitment to our customers, diverse product offering and focus on profitability for both our company and our retail partners have enabled us to gain shelf space and secure premium placement of our products at many major retailers. Our top retail and distributor partners include Academy, AcuSport, Amazon, Cabela's, Dick's Sporting Goods, Gander Mountain, Nations Best Sports, Sports Inc., Sports South Inc., and Walmart. For many of our top retail partners, our management team interfaces directly with their executives to ensure we are delivering the products our retailers need to meet the demands of the end user in the most efficient and profitable manner possible. Furthermore, we believe our scale is a unique competitive advantage that allows us to leverage our platform to efficiently and profitably service our largest retail customers. For example, we work with
our key retail customers to develop marketing and advertising campaigns, provide inventory replenishment support and organize product category merchandising plans. These capabilities give us an advantage as we believe few competitors offer this level of retail support or a more comprehensive product portfolio.
Proven M&A Capabilities
We have a history of successfully identifying, acquiring, integrating and growing complementary businesses. For example, in fiscal year 2014, we acquired two companies, Savage Arms and Bushnell, both of which grew our presence in the outdoor recreation and shooting sports markets and enhanced our manufacturing, product development and distribution platform for future acquisitions. In fiscal year 2016, we acquired two companies, Jimmy Styks and CamelBak, both of which continued our growing presence in the outdoor recreation market and expanded our product portfolio. We have also maintained the discipline to forgo certain acquisition opportunities that did not meet our specific operating and return on investment criteria. We believe our integrated outdoor sports and recreation platforms, leading brands and scale enable us to enhance the cost synergy potential and success of an acquisition by leveraging our customer relationships, sales and marketing resources, low-cost manufacturing and distribution network. We also believe our broad distribution network and retail partnerships can accelerate revenue growth in acquired companies.
Our Strategy
Capitalize on a Growing and Fragmented Market
We seek to capitalize on the growing and fragmented market opportunities in the outdoor sports and recreation markets. We believe our scalable business platform, strong retail and wholesale relationships and product development capabilities position us to capture additional market share. We intend to utilize our existing infrastructure and manufacturing capabilities to support the growth of our retail customers, and we will continue to leverage our economies of scale and distribution capabilities to efficiently capture the upside potential related to increases in consumer demand.
Develop New and Innovative Products to Drive Organic Growth and Customer Loyalty
We intend to continue to drive organic growth and customer loyalty through the development of new and innovative products. We believe our outdoor enthusiast consumers demand the latest technologies and performance enhancements, which drives new consumer purchases or replacement purchases for older products. We expect that our product development strategy will enable us to grow sales, maintain or increase profit margins and preserve the strength of our brands.
Expand into Complementary or Adjacent Categories Through M&A
Given our financial flexibility and the highly fragmented nature of our industry, we believe we have the opportunity to continue to supplement our organic growth with acquisitions. We intend to maintain our highly disciplined approach to acquisitions, focusing on transactions that we believe will deliver significant shareholder value, create synergies and enable us to penetrate new markets, enter new product categories or service new channels. We intend to leverage the strength of our current brands and our knowledge of the end consumer to enter adjacent markets that target customers within the outdoor sports and recreation markets. We believe our free cash flow profile and strong balance sheet position provide us the financial flexibility to aggressively pursue strategic M&A.
Leverage Relationships with Our Wholesale and Retail Channels
We have strong relationships with a number of leading wholesalers as well as mass and specialty retailers. We continuously strive to strengthen our relationships by working closely with each of our channel partners. This may include providing marketing support, supporting joint merchandising programs and managing inventory on our partners' behalf. We will continue to leverage these relationships to secure increased shelf space and premium product placement and to increase retailer sell-through of our products. As a result, we expect to continue to grow our market share.
Continuously Improve Operations
We have a strong focus on continuous improvement in all facets of our business, including engineering, product development, manufacturing, sourcing, sales, distribution and administrative functions. We use our business model, VPM, to align functional execution to the goals of the enterprise and to implement these goals throughout the organization. We also use VPM to identify opportunities for process improvement and to implement and monitor quality and efficiency-focused refinements to our processes. We expect to continue to use VPM to drive operational improvements in our legacy business
areas, our recent acquisitions and in future acquired businesses to deliver improved competitive positions and margin improvement.
Business Operations
Operating Segments
Vista Outdoor operates through two operating segments: Shooting Sports and Outdoor Products. Both of our segments enjoy expanded distribution for some of the most widely known and respected brands in the industry. See Note 16 to our consolidated and combined financial statements for financial information regarding our segments.
Shooting Sports
The Shooting Sports segment designs, develops, produces, and sources ammunition and firearms for the hunting and sport shooting enthusiast markets, as well as ammunition for local law enforcement, the U.S. government and international markets. Our Federal Premium and Speer brands of ammunition are market-leaders. Additional ammunition brands include American Eagle, Blazer, CCI, Estate Cartridge, Fusion and Independence. Our firearms products include centerfire rifles, rimfire rifles, shotguns and range systems. The Savage Arms brand is a leader in the sporting long gun market. Other brands include Savage Range Systems and Stevens. Our Shooting Sports segment generated 62% of our external sales in fiscal year 2016.
Outdoor Products
The Outdoor Products product lines are archery/hunting accessories, global eyewear and sport protection, golf, hydration products, optics, shooting accessories, tactical products and water sports. Archery/hunting accessories include high-performance hunting arrows, game calls, hunting blinds, game cameras and waterfowl decoys. Global eyewear and sport protection products include safety and protective eyewear, as well as fashion and sports eyewear and helmets. Golf products include laser rangefinders. Hydration products include hydration packs and water bottles. Optics products include binoculars, riflescopes and telescopes. Shooting accessories products include reloading equipment, clay targets, and premium gun care products. Tactical products include holsters, duty gear, bags and packs. Water sports products include stand up paddle boards. These products are marketed under a number of well-known brand names including: Alliant Powder, Bee Stinger, BLACKHAWK!, Bollé, Bushnell, Butler Creek, CamelBak, Cébé, Champion Target, Eagle, Final Approach, Gold Tip, GunMate, Gunslick Pro, Hoppe's, Jimmy Styks, M-Pro 7, Millett, Night Optics, Outers, Primos, RCBS, Redfield, Serengeti, Simmons, Stoney Point, Tasco, Uncle Mike's and Weaver. Our Outdoor Products segment generated 38% of our external sales in fiscal year 2016.
Customers and Marketing
Our customers are outdoor sporting enthusiasts, hunters, recreational shooters and athletes, as well as law enforcement and military professionals. Sales to our top ten retail customers accounted for approximately 40% of our consolidated net sales in fiscal year 2016. In fiscal year 2016, U.S. consumers represented 72% of our sales, while international customers represented 15% and law enforcement and military professionals represented 13%. See Note 16 to our consolidated and combined financial statements for further information regarding our customers and geographic information regarding our sales. We believe the outdoor industry is led by enthusiasts with a passion for reliable, high-performance products, who rely on a wide variety of media for opinions and recommendations about available products. We utilize third-party endorsements and purchased media to enhance the perception of our brands and products and to reinforce our leadership positions in the market. For example, we routinely garner coverage in leading print and digital trade and non-trade publications that include Field & Stream, Guns & Ammo and American Rifleman. We supplement this exposure with data-driven print advertising that is designed to maximize reach and return on investment. We have an industry-leading digital media presence that includes YouTube influencers and Vista Outdoor brand portfolio content sites Range365 and Shoot101. Our approach is reaching the new and recreational target shooter audience. Our integrated efforts include broadcast exposure on top networks and sponsorship of ratings-leading programming such as Bone Collector, Buckmasters, Guns & Ammo and Primos' Truth About Hunting. We also rely on brand ambassadors within the industry such as Michael Waddell and Rickie Fowler, and mainstream personalities such as Troy, Jacob, and Chase Landry on the hit series "Swamp People".
Quality Assurance
We maintain a disciplined quality assurance process. We set stringent metrics to drive year-over-year quality improvements. We have also have a customer call center process, which allows us to collect important customer data, providing
us with the opportunity to make improvements to our quality to ensure that our customers are satisfied with our customer service process.
Employees
We employ approximately 5,800 people. We operate 13 manufacturing facilities in the United States, Puerto Rico, Mexico and Canada. We have union-represented employees at our Westfield, MA location, comprising approximately 6% of our total workforce. We have had no strikes or work stoppages during the last five years. We believe that our employee relations are generally good.
Competition
Competition in the markets in which we operate is based on a number of factors, including price, quality, product innovation, performance, reliability, styling, product features and warranties, as well as sales and marketing programs. Significant competitors in the outdoor sporting market include Amer Sports, Jarden, Johnson Outdoors, and Thule Group. Significant accessories competitors include major optics companies Luxottica Group and Nikon and hydration system competitors including Bubba, Contigo, and Nalgene. Significant ammunition competitors include Remington Arms, Winchester Ammunition of Olin Corporation and various smaller manufacturers and importers, including Black Hills Ammunition, CBC Group, Fiocchi Ammunition, Hornady, PMC, Rio Ammunition and Wolf. Significant firearms competitors include Mossberg, Marlin, Ruger, Remington Arms, Smith and Wesson and Winchester.
Seasonality
Our business experiences a certain level of seasonality. Sales of our spring products and summer products, such as golf accessories, can be adversely impacted by unseasonably cold or wet weather in those periods. Sales of our hunting accessories are generally highest during the months of August to December due to shipments around the fall hunting season and holidays. Sales of sporting ammunition have historically been lower in our first fiscal quarter. Our winter sport accessories sales can be negatively impacted by unseasonably warm or dry weather in our markets.
Intellectual Property
In the highly competitive business in which we operate, our trade names, service marks and trademarks are important to distinguish our products and services from those of our competitors. We rely upon trade secrets, continuing technological innovations and licensing arrangements to maintain and improve our competitive position. We also have a portfolio of over 500 U.S. and foreign patents, and we believe these patents, as well as unpatented research, development and engineering skills, make important contributions to our business. We are not aware of any facts which would negatively impact our continuing use of any of our trade names, service marks, trademarks or patents.
Regulatory Matters
Like many other manufacturers and distributors of consumer products, we are required to comply with a wide variety of laws, rules and regulations, including those surrounding labor and employment law, environmental law, consumer product safety, and the export and import of our products. These laws, rules and regulations currently impose significant compliance requirements on our business, and more restrictive laws, rules and regulations may be adopted in the future. We believe we are in material compliance with all applicable domestic and international laws and regulations.
Our operations are subject to a variety of international, federal, state and local laws and regulations relating to environmental protection, including those governing the discharge, treatment, storage, transportation, remediation and disposal of hazardous materials and wastes, and restoration of damages to the environment, as well as health and safety matters. We believe that our operations are in material compliance with these laws and regulations and that forward-looking, proper and cost-effective management of air, land and water resources is vital to the long-term success of our business. Our environmental policy identifies key objectives for implementing this commitment throughout our operations. We incur operating and capital costs on an ongoing basis to comply with environmental requirements, and could incur significant additional costs as a result of more stringent requirements that may be promulgated in the future.
Some environmental laws, such as the U.S. federal Superfund law and similar state laws, can impose liability, without regard to fault, for the entire costs of the cleanup of contaminated sites on current or former site owners and operators or parties who sent wastes to such sites. We are conducting investigation and/or remediation activities at certain of our current or former sites where impacts from historical operations have been identified. We also have been identified as a PRP, along with other
parties, in regulatory agency actions associated with hazardous waste disposal sites. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities at these sites, based on currently available information, we do not currently expect these matters, 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 as a result of any additional obligations imposed or conditions identified at these or other sites in the future.
As a manufacturer and distributor of consumer products, we are subject to various domestic and international consumer product safety laws, such as the Consumer Products Safety Act, which empowers the Consumer Products Safety Commission to investigate and deem certain of our products as unsafe or hazardous. Under certain circumstances, the Consumer Products Safety Commission or similar international agencies could ask a court to require us to repurchase or recall one or more of our products. In addition, laws regulating certain consumer products exist in some cities and states, as well as in other countries in which we sell our products.
We are also subject to the rules and regulations of the ATF and various state and international agencies that control the manufacture, export, import, distribution and sale of firearms, explosives and ammunition. If we fail to comply with these rules and regulations, these agencies may limit our growth or business activities, or, in extreme cases, revoke our licenses to do business. Our business, as well as the business of all producers and marketers of ammunition and firearms, is also subject to numerous federal, state, local and foreign laws, regulations and protocols. Applicable laws:
• require the licensing of all persons manufacturing, exporting, importing or selling firearms and ammunition as a business;
• require serialization, labeling and tracking the acquisition and disposition of firearms, certain types of ammunition, and certain related products;
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• | require background checks for purchasers of firearms; |
• impose waiting periods between the purchase of a firearm and the delivery of a firearm;
• prohibit the sale of firearms to certain persons, such as those below a certain age and persons with criminal records;
• regulate the use and storage of gun powder or other energetic materials;
• regulate the interstate sale of certain firearms and ammunition;
• prohibit the interstate mail-order sale of firearms;
• regulate our employment of personnel with certain criminal convictions; and
• restrict access to firearm or ammunition manufacturing facilities for certain individuals from other countries or with criminal convictions.
In some cases, the handling of our technical data and the international sale of our products is also regulated by the U.S. Department of State and Department of Commerce. These agencies oversee the export of our products including firearms, shotguns, ammunition and night vision devices, amongst other products. In many instances, we must obtain export authorizations for international shipments. In addition, the ITAR requires congressional approval for any firearms export application with a total value of $1 million or higher. To date, most of our requests for export licenses have been approved. These agencies can impose civil and criminal penalties, including denying us from exporting our products, for failure to comply with applicable laws and regulations.
We are also regulated by the U.S. Department of Homeland Security, which handles the out-bound and in-bound movement of certain of our products, as well as components, parts, and materials used in our manufacturing processes. The agency can detain and seize shipments, as well as penalize us for failure to comply with applicable regulations. Also, the agency works closely with the Department of State and the Department of Commerce to ensure compliance in protection of national security.
Foreign regulations, which may affect our products, are numerous and may be ambiguous or otherwise unclear. We prefer to work with distributors who are familiar with the applicable import regulations in our foreign markets. Experience with foreign distributors in the past indicates that restrictions may prohibit certain sales of our products in a number of countries. We rely on our distributors to inform us of those countries where our products are prohibited or restricted.
Executive Officers
The following table sets forth certain information with respect to Vista Outdoor's executive officers as of May 27, 2016:
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Name | | Age | | Title |
Mark W. DeYoung | | 57 | | Chairman and Chief Executive Officer |
Stephen M. Nolan | | 47 | | Senior Vice President and Chief Financial Officer |
Scott D. Chaplin | | 49 | | Senior Vice President, General Counsel and Secretary |
Stephen S. Clark | | 47 | | Senior Vice President, Human Resources and Corporate Services |
Kelly T. Grindle | | 49 | | President, Outdoor Products |
Robert J. Keller | | 48 | | President, Shooting Sports |
Each of the above individuals serves at the pleasure of the Board of Directors. No family relationship exists among any of the executive officers or among any of them and any director of Vista Outdoor. There are no outstanding loans from Vista Outdoor to any of these individuals. Information regarding the employment history (in each case with Vista Outdoor unless otherwise indicated) of each of the executive officers is set forth below.
Mark W. DeYoung, age 57, has served as our Chairman and Chief Executive Officer since Vista Outdoor's creation in February 2015. Mr. DeYoung served as President and Chief Executive Officer of Orbital ATK from February 2010 to February 2015. From 2002 to February 2010, he was President of Orbital ATK's largest business segment, the Armament Systems Group (formerly Ammunition Systems Group). Mr. DeYoung is the Chairman of the Congressional Sportsmen's Foundation in Washington DC and has served on the foundation's board for nearly eight years. He also served on the board of the National Shooting Sports Foundation. He has current and past memberships in Ducks Unlimited, Wild Sheep Foundation, Pheasants Forever, Rocky Mountain Elk Foundation, Mule Deer Foundation, Quail Forever, and the NRA. Mr. DeYoung has over 25 years of experience acquiring, growing and improving the performance of businesses in the defense, aerospace and commercial sectors.
Stephen M. Nolan, age 47, has served as our Senior Vice President and Chief Financial Officer since February 2015. Mr. Nolan served as Senior Vice President of Strategy and Business Development of Orbital ATK from July 2013 to February 2015. From February 2013 through July 2013, he served as Orbital ATK's Interim Senior Vice President of Business Development. From 2010 to 2013, he was Orbital ATK's Vice President, Strategy and Business Development, Aerospace Systems, and from 2009 to 2010, he was Orbital ATK's Vice President and General Manager, Advanced Systems. Prior to that, he held a number of leadership positions across Orbital ATK. Before joining Orbital ATK in 2006, he was a Director of Corporate Strategy and Development at Raytheon Company and, before that, an Engagement Manager at McKinsey & Company.
Scott D. Chaplin, age 49, has served as our Senior Vice President, General Counsel and Secretary since February 2015. Mr. Chaplin served as Senior Vice President, General Counsel and Corporate Secretary of Orbital ATK from October 2012 through February 2015. Before joining Orbital ATK, he served as Senior Vice President, General Counsel and Corporate Secretary of Stanley, Inc., an information technology company and before that as Vice President and General Counsel of BAE Systems Information Technology. From 1999 to 2004, he served as Vice President and General Counsel of DigitalNet, Inc. He also worked as an adjunct professor of law at American University, Washington College of Law and as an associate attorney for Morgan, Lewis & Bockius LLP and Reed Smith LLP, both in Washington, D.C.
Stephen S. Clark, age 47, has served as our Senior Vice President, Human Resources and Corporate Services since February 2015. Prior to joining Vista Outdoor, Mr. Clark served as Senior Vice President and Chief People Officer for the H.J. Heinz Company, a food products manufacturer. He joined Heinz in 2002 and held various and increasing leadership roles within the human resources function, including serving as Senior Vice President and Chief People Officer from October 2005 to June 2013. Mr. Clark was the director of staffing for the Salt Lake Organizing Committee (SLOC) for the 2002 Olympic and Paralympic Winter Games from 1998 to 2002. He also served in human resources management positions for Pizza Hut, Inc. from 1995 to 1998.
Kelly T. Grindle, age 49, has served as our President, Outdoor Products since January 2016. Prior to joining Vista Outdoor, Mr. Grindle served as Senior Group Vice President, Marine Electronics, Watercraft and Diving for Johnson Outdoors, Inc. Prior to this he served in a variety of leadership roles within Johnson Outdoors beginning when he joined the company in 2000.
Robert Keller, age 48, has served as our President, Shooting Sports since May 2016. Prior to joining Vista Outdoor, Mr. Keller was the President and CEO of Escalade, Inc., from August 2007 to December 2015. From May 2005 to Sept. 2006, he was the
President of Disston Company. From 2000 to 2005, Mr. Keller worked for Russell Corporation in various positions of increasing responsibility including President of a sports apparel unit. From 1997 to 2000, Mr. Keller worked for Coca-Cola Company as a Managing Director. From 1993 to 1997, he co-founded and led Armor All Home Care, later acquired by The Clorox Company.
Available Information
You can find reports on our company filed with the SEC on our Internet site at www.vistaoutdoor.com under the "Investor Relations" heading free of charge. These include our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make these reports available as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
You can also obtain these reports from the SEC's Public Reference Room, which is located at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by phone (1-800-SEC-0330) or on the Internet (www.sec.gov). This site contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The content on any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
Glossary and Acronyms
Glossary
Bushnell: Refers to Bushnell Group Holdings, Inc.
2014 Credit Agreement: Refers to the Vista Outdoor Inc. Amended and Restated Credit Agreement, dated as of December 19, 2014 among Vista Outdoor Inc., Bank of America, N.A. and the Lenders party thereto.
2016 Credit Agreement: Refers to the Vista Outdoor Inc. Amended and Restated Credit Agreement, dated as of April 1, 2016 among Vista Outdoor Inc., Bank of America, N.A. and the Lenders party thereto.
Form 10: Registration Statement filed by Vista Outdoor on Form 10, as amended on January 16, 2015.
Lake City: Refers to the Lake City Army Ammunition Plant operated by a subsidiary of OrbitalATK.
Merger: Refers to a subsidiary of ATK merging with and into Orbital Sciences Corporation with Orbital Sciences Corporation surviving the Merger as a wholly owned subsidiary of ATK, immediately following the Spin-Off.
Orbital ATK: Refers to Alliant Techsystems Inc. (ATK) prior to February 9, 2015 and to Orbital ATK for periods subsequent to February 9, 2015.
Savage Arms: Refers to Caliber Company, parent company of Savage Sports Corporation
Spin-Off: Refers to Orbital ATK's completion of the previously announced spin-off of its Sporting Group into Vista Outdoor.
Transaction Agreement: Refers to the Transaction Agreement, dated as of April 28, 2014, among Alliant Techsystems Inc., Vista Outdoor Inc., Vista Merger Sub Inc. and Orbital Sciences Corporation
Vista Outdoor, the Company, we, our, and us: Refers to Vista Outdoor Inc. for disclosures relating to periods subsequent to February 9, 2015. For disclosures relating to periods prior to February 9, 2015, refers to the ATK Sporting Group.
Acronyms
ATF: Bureau of Alcohol, Tobacco, Firearms and Explosives
DMD: Domestic manufacturing deduction
EAR: Export Administration Regulations
ITAR: International Traffic in Arms Regulations
M&A: Mergers & Acquisitions
NICS: National Instant Criminal Background Check System
NSSF: National Shooting Sports Foundation
PRP: potentially responsible party
R&D: research and development
SEC: Securities and Exchange Commission
SFIA: Sports & Fitness Industry Association
VPM: Vista Performance Management
ITEM 1A. RISK FACTORS
Vista Outdoor is subject to a number of risks, including those related to domestic and international sales. The material risks facing Vista Outdoor are discussed below.
Competition in our industry may hinder our ability to execute our business strategy, achieve profitability or maintain relationships with existing customers.
We operate in a highly competitive industry and we compete against manufacturers that have well-established brand names and strong market positions. Significant competitors in the outdoor sporting market include Amer Sports, Jarden, Johnson Outdoors, and Thule Group. Significant accessories competitors include major optics companies Luxottica Group and Nikon and hydration system competitors including Bubba, Contigo, and Nalgene. Significant ammunition competitors include Remington Arms, Winchester Ammunition of Olin Corporation and various smaller manufacturers and importers, including Black Hills Ammunition, CBC Group, Fiocchi Ammunition, Hornady, PMC, Rio Ammunition and Wolf. Significant firearms competitors include Mossberg, Marlin, Ruger, Remington, Smith and Wesson and Winchester.
Competition in the markets in which we operate is based on a number of factors, including price, quality, product innovation, performance, reliability, styling, product features and warranties, as well as sales and marketing programs. Competition could cause price reductions, reduced profits or losses or loss of market share, any of which could have a material adverse effect on our business, financial condition or results of operations. Certain of our competitors may be more diversified than us or may have financial and marketing resources that are substantially greater than ours, which may allow these competitors to invest more heavily in intellectual property, product development and advertising. Since many of our competitors also source their products from third parties, our ability to obtain a cost advantage through sourcing is reduced.
Certain of our competitors may be willing to reduce prices and accept lower profit margins to compete with us. Further, retailers often demand that suppliers reduce their prices on mature products, which could lead to lower margins.
Internationally, our products typically face more competition where foreign competitors manufacture and market products in their respective countries. This allows those competitors to sell products at lower prices, which could adversely affect our competitiveness. In addition, our products compete with many other sporting and recreational products for the discretionary spending of consumers. Failure to effectively compete with these other competitors or alternative products could have a material adverse effect on our performance.
Our results of operations could be materially harmed if we are unable to forecast demand for our products accurately.
We often schedule internal production and place orders for products with third party suppliers before receiving firm orders from our customers. For example, the ammunition products supply agreement with Orbital ATK offers an incentive for us to place a large advance order. Under such agreement, if we place a sizable order for certain ammunition products prior to the start of the fiscal year in which they are to be delivered, during such fiscal year, subject to certain exceptions, Orbital ATK will only sell small-caliber ammunition products manufactured at its Lake City plant to us and the U.S. Department of Defense. Therefore, if we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our products include:
• an increase or decrease in consumer demand for our products or for the products of our competitors;
• our failure to accurately forecast customer acceptance of new products;
• new product introductions by competitors;
• changes in our relationships with customers;
• changes in general market conditions or other factors, which may result in cancellations of orders or a reduction or increase in the rate of reorders placed by retailers;
• changes in laws and regulations governing the activities for which we sell products, such as hunting and shooting sports;
• weak economic conditions or consumer confidence, which could reduce demand for discretionary items such as our products; and
• the domestic political environment, including debate over the regulation of firearms, ammunition and related products.
Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on our business, financial condition or results of operations. If we underestimate demand for our products, our manufacturing facilities or third party suppliers may not be able to create products that meet customer demand, and this could result in delays in the shipment of products and lost revenues, as well as damage to our reputation and customer relationships. We may not be able to manage inventory levels successfully to meet future order and reorder requirements.
Our sales are highly dependent on purchases by several large retail customers, and we may be adversely affected by the loss of, or any significant decline in sales to, one or more of these customers.
The U.S. retail industry serving the outdoor recreation market has become relatively concentrated. Sales to the top ten retail customers accounted for approximately 40% of our consolidated net sales in the fiscal year ended March 31, 2016. Further consolidation in the U.S. retail industry could increase the concentration of our retail store customer base in the future.
Although we have long-established relationships with many of our retail store customers, as is typical in the markets in which we compete, we do not have long-term purchase agreements with our customers. As such, we are dependent on individual purchase orders. As a result, these retail store customers would be able to cancel their orders, change purchase quantities from forecast volumes, delay purchases, change other terms of our business relationship or cease to purchase our products entirely. The loss of any one or more of our retail store customers or significant or numerous cancellations, reductions, delays in purchases or changes in business practices by our retail store customers could have an adverse effect on our business, financial condition or results of operations.
We have historically relied on Orbital ATK for certain of our ammunition and gun powder products. After the Spin-Off, our relationship with Orbital ATK has changed and may adversely affect our supply of these products.
We rely on Orbital ATK for certain of our ammunition and gun powder products. Concurrently with the Spin-Off, we entered into a supply agreement with a subsidiary of Orbital ATK pursuant to which the Lake City plant operated by such subsidiary will manufacture and supply certain of our requirements for 5.56mm (including .223 caliber), 7.62mm and .50 caliber ammunition products, subject to certain exceptions. We also entered into an additional Supply Agreement pursuant to which a subsidiary of Orbital ATK will manufacture and supply certain of our gun powder products. The Supply Agreements provide that, following the Spin-Off, (1) Orbital ATK and its subsidiaries will manufacture and supply all of our requirements for 5.56mm (including .223 caliber), 7.62mm and .50 caliber cartridge ammunition products, in each case excluding any frangible ammunition products (referred to as the "ammunition products") and certain Alliant canister gun powder products (referred to as the "gun powder products"), subject to capacity limitations and, in the case of ammunition products, the priority rights of the U.S. Department of Defense and (2) we will purchase all of our requirements for such products from Orbital ATK and its subsidiaries (and will not purchase such products from another party or manufacture such products ourselves), subject to the right to "cure" if Orbital ATK and its subsidiaries fail to perform. Notwithstanding the foregoing, we generally may continue to manufacture certain ammunition historically manufactured by the Shooting Sports segment.
If our ammunition products order for a given fiscal year meets or exceeds an agreed amount, during such fiscal year, subject to certain exceptions, Orbital ATK and its subsidiaries will only be permitted to sell small caliber ammunition products produced at its Lake City plant to us and the U.S. Department of Defense. If our ammunition products order for a given fiscal year is less than such amount, then Orbital ATK and its subsidiaries may sell those small caliber ammunition products to any other party during such fiscal year. Orbital ATK and its subsidiaries will only be permitted to sell canister gun powder products to us, irrespective of the amount of gun powder products ordered by us. The ammunition products Supply Agreement also prohibits us from reselling 5.56mm (including .223 caliber), 7.62mm and .50 caliber ammunition products (excluding any frangible ammunition products) to the U.S. Department of Defense, although we generally may continue to sell to the U.S. Department of Defense certain ammunition that the Shooting Sports segment historically sold to the U.S. Department of Defense.
The initial term of each Supply Agreement expires on February 9, 2018. The ammunition products Supply Agreement is renewable for an additional three-year term and one further term thereafter ending on September 30, 2023, while the gun powder products Supply Agreement is renewable for additional one-year terms. After the Spin-Off, our relationship with Orbital ATK has changed and such change may affect our supply of ammunition products and gun powder products. We may
not be able to renew the Supply Agreements or that we will be able to source ammunition products or gun powder products from another supplier on favorable terms or at all. If we fail to maintain an adequate supply of ammunition products and gun powder products, our business, financial condition or results of operations could be adversely affected.
Significant supplier capacity constraints, supplier production disruptions, supplier quality issues or price increases could increase our operating costs and adversely impact the competitive positions of our products.
Our reliance on third party suppliers for various product components and finished goods exposes us to volatility in the availability, quality and price of these product components and finished goods. A disruption in deliveries from our third party suppliers, capacity constraints, production disruptions, price increases or decreased availability of raw materials or commodities could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. Quality issues experienced by third party suppliers can also adversely affect the quality and effectiveness of our products and result in liability and reputational harm.
Following the Spin-Off, we rely on Orbital ATK for certain of our ammunition and gun powder products. If the production capabilities of Orbital ATK's Lake City plant or Radford plant change such that we fail to maintain an adequate supply of ammunition and gun powder products, our operating costs could increase and the competitive positions of our ammunition and gun powder products could be adversely impacted.
We face risks relating to our international business that could adversely affect our business, financial condition or results of operations.
Our ability to maintain the current level of operations in our existing international markets and to capitalize on growth in existing and new international markets is subject to risks associated with doing business internationally, including:
• issues related to managing international operations;
• potentially adverse tax developments;
• lack of sufficient protection for intellectual property in some countries;
• currency exchange
• import and export controls;
• social, political and economic instability in the countries in which we operate;
• local laws and regulations, including those governing labor, product safety and environmental protection; and
• limitations on our ability to efficiently repatriate cash from our foreign operations.
Any one or more of these risks could adversely affect our business, financial condition or results of operations.
Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation, as well as export controls and trade sanctions, could result in fines or criminal penalties.
The international nature of our business exposes us to trade sanctions and other restrictions imposed by the U.S. and other governments. The U.S. Departments of Justice, Commerce, Treasury and other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the Foreign Corrupt Practices Act, anti-boycott provisions and other federal statutes, sanctions and regulations and, increasingly, similar or more restrictive foreign laws, rules and regulations, which may also apply to us. By virtue of these laws and regulations, and under laws and regulations in other jurisdictions, we may be obliged to limit our business activities, we may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance. In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws and we expect the relevant agencies to continue to increase these activities. A violation of these laws, sanctions or regulations could result in restrictions on our exports, civil and criminal fines or penalties and could adversely impact our business, financial condition or results of operations.
Our revenues and results of operations may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.
Our revenues and results of operations have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:
• market acceptance of our products and services;
• the timing of large domestic and international orders;
• cancellation of existing orders;
• the outcome of any existing or future litigation;
• adverse publicity surrounding our products, the safety of our products or the use of our products;
• changes in our sales mix;
• new product introduction costs;
• complexity in our integrated supply chain;
• increased raw material expenses;
• changes in amount and/or timing of our operating expenses; and
• changes in laws and regulations that may affect the marketability of our products.
As a result of these and other factors, we believe that period-to-period comparisons of our results of operations may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.
Seasonality and weather conditions may cause our results of operations to vary from quarter to quarter.
Because many of the products we sell are used for seasonal outdoor sporting activities, our results of operations may be significantly impacted by unseasonable weather conditions in our markets. For example, our winter sport accessories sales are dependent on cold winter weather and snowfall in our markets, and can be negatively impacted by unseasonably warm or dry weather in our markets. Conversely, sales of our spring products and summer products, such as golf accessories, can be adversely impacted by unseasonably cold or wet weather in those periods. Accordingly, our sales results and financial condition will typically suffer when weather patterns do not conform to seasonal norms.
Sales of our hunting accessories are highest during the months of August through December due to shipments around the fall hunting season and holidays. In addition, sales of our ammunition have historically been lower in our first fiscal quarter. The seasonality of our sales may change in the future. Seasonal variations in our results of operations may reduce our cash on hand, increase our inventory levels and extend our accounts receivable collection periods. This in turn may cause us to increase our debt levels and interest expense to fund our working capital requirements.
Our success depends upon our ability to introduce new products into the market that meet our high standards and match customer preferences.
Our efforts to introduce new products into the market may not be successful, and any new products that we introduce may not result in customer or market acceptance. We both develop and source new products that we believe will match customer preferences. The development of new products is a lengthy and costly process and may not result in the development of a successful product. In addition, the sourcing of our products is dependent, in part, on our relationships with our third party suppliers. If we are unable to maintain these relationships, we may not be able to continue to source products at competitive prices that both meet our standards and appeal to our customers. Failure to develop or source and introduce new products that consumers want to buy could decrease our sales, operating margins and market share and could adversely affect our business, financial condition or results of operations.
Even if we are able to develop or source new products, our efforts to introduce new products may be costly and ineffective. When introducing a new product, we incur expenses and expend resources to market, promote and sell the new product. New products that we introduce into the marketplace may be unsuccessful or may achieve success that does not meet our expectations for a variety of reasons, including failure to predict market demand, delays in introduction, unfavorable cost comparisons with alternative products and unfavorable performance. Significant expenses related to new products that prove to be unsuccessful for any reason will adversely affect our results of operations.
Some of our products contain licensed, third party technology that provides important product functionality and features. The loss or inability to obtain any such license could have a material adverse effect on our business.
Our products may contain technology licensed from third parties that provides important product functionality and features. We cannot assure you that we will have continued access to this technology. For example, if the licensing company ceases to exist, either from bankruptcy, dissolution or purchase by a competitor, we may lose access to important third party technology and may not be able to obtain replacement technology on favorable terms or at all. In addition, legal actions, such as intellectual property actions, brought against the licensing company could impact our future access to the technology. Any of these actions could negatively impact our technology licensing, thereby reducing the functionality and features of our products, and adversely affect our business, financial condition or results of operations.
We manufacture and sell products that create exposure to potential product liability, warranty liability or personal injury claims and litigation.
Some of our products are used in applications and situations that involve risk of personal injury and death. Our products expose us to potential product liability, warranty liability or personal injury claims and litigation relating to the use or misuse of our products including allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product or activities associated with the product, negligence and strict liability. If successful, such claims could have a material adverse effect on our business. Although we maintain product liability insurance in amounts that we believe are reasonable, we may not be able to maintain such insurance on acceptable terms, if at all, in the future and product liability claims may exceed the amount of insurance coverage. In addition, our reputation may be adversely affected by such claims, whether or not successful, including potential negative publicity about our products.
Defects in our products could reduce demand for our products and result in a decrease in sales, delays in market acceptance and damage to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. In addition, we obtain many of our products and component parts from third party suppliers and may not be able to detect defects in such products or component parts until after they are sold. Defects in our products may result in a loss of sales, recall expenses delay in market acceptance and damage to our reputation and increased warranty costs, which could have a material adverse effect on our business, financial condition or results of operations.
We are subject to extensive regulation and could incur fines, penalties and other costs and liabilities under such requirements.
Like many other manufacturers and distributors of consumer products, we are required to comply with a wide variety of laws, rules and regulations, including those surrounding labor and employment law, environmental law, the export and import of our products, taxation and consumer products generally. These laws, rules and regulations currently impose significant compliance requirements on our business, and more restrictive laws, rules and regulations may be adopted in the future.
Our operations are subject to a variety of laws and regulations relating to environmental protection, including those governing the discharge, treatment, storage, transportation, remediation and disposal of certain materials and wastes, and restoration of damages to the environment, as well as health and safety matters. We could incur substantial costs, including remediation costs, resource restoration costs, fines, penalties and third party property damage or personal injury claims as a result of liabilities under or violations of such laws and regulations or the permits required thereunder. While environmental laws and regulations have not had a material adverse effect on our business, financial condition or results of operations, the ultimate cost of environmental liabilities is difficult to accurately predict and we could incur material additional costs as a result of requirements or obligations imposed or liabilities identified in the future.
As a manufacturer and distributor of consumer products, we are subject to the Consumer Products Safety Act, which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances, the Consumer Products Safety Commission could require us to repurchase or recall one or more of our products. In addition, laws regulating certain consumer products exist in some cities and states, as well as in other countries in which we sell our products, and more restrictive laws and regulations may be adopted in the future. Any repurchase or recall of our products could be costly to us and could damage our reputation. If we were required to remove, or we voluntarily removed, our products from the market, our reputation could be tarnished and we could have large quantities of finished products that we are unable to sell.
We are also subject to the rules and regulations of the ATF. If we fail to comply with ATF rules and regulations, the ATF may limit our growth or business activities, levy fines against us or, ultimately, revoke our license to do business. Our business, as well as the business of all producers and marketers of ammunition and firearms, is also subject to numerous federal, state, local and foreign laws, regulations and protocols. Applicable laws:
• require the licensing of all persons manufacturing, exporting, importing or selling firearms and ammunition as a business;
• require background checks for purchasers of firearms;
• impose waiting periods between the purchase of a firearm and the delivery of a firearm;
• prohibit the sale of firearms to certain persons, such as those below a certain age and persons with criminal records;
• regulate the use and storage of gun powder or other energetic materials;
• regulate the interstate sale of certain firearms;
• prohibit the interstate mail-order sale of firearms;
• regulate our employment of personnel with criminal convictions; and
• restrict access to firearm manufacturing facilities for individuals from other countries or with criminal convictions.
Also, the export of our products is controlled by ITAR and EAR. The ITAR implements the provisions of the Arms Export Control Act and is enforced by the U.S. Department of State. The EAR implements the provisions of the Export Administration Act and is enforced by the U.S. Department of Commerce. Among their many provisions, the ITAR and the EAR require a license application for the export of many of our products. In addition, the ITAR requires congressional approval for any firearms export application with a total value of $1 million or higher. Further, because our manufacturing process includes certain toxic, flammable and explosive chemicals, we are subject to the Chemical Facility Anti-Terrorism Standards, as administered by the U.S. Department of Homeland Security, which require that we take additional reporting and security measures related to our manufacturing process.
Several states currently have laws in effect that are similar to, and in certain cases, more restrictive than, these federal laws. Compliance with all of these regulations is costly and time-consuming. Inadvertent violation of any of these regulations could cause us to incur fines and penalties and may also lead to restrictions on our ability to manufacture and sell our products and services and to import or export the products we sell.
Changes in government policies and firearms legislation could adversely affect our financial results.
The sale, purchase, ownership and use of firearms are subject to numerous and varied federal, state and local governmental regulations. Federal laws governing firearms include the National Firearms Act, the Federal Firearms Act, the Arms Export Control Act and the Gun Control Act of 1968. These laws generally govern the manufacture, import, export, sale and possession of firearms and ammunition. We hold all necessary licenses to legally sell firearms and ammunition in the United States.
Currently, the federal legislature and several state legislatures are considering additional legislation relating to the regulation of firearms and ammunition. These proposed bills are extremely varied. If enacted, such legislation could effectively ban or severely limit the sale of affected firearms or ammunition. In addition, if such restrictions are enacted and are incongruent, we could find it difficult, expensive or even practically impossible to comply with them, which could impede new
product development and the distribution of existing products. We cannot assure you that the regulation of our business activities will not become more restrictive in the future and that any such restriction will not have a material adverse effect on our business.
If our efforts to protect the security of personal information about our customers and consumers are unsuccessful and unauthorized access to that personal information is obtained, or we experience a significant disruption in our computer systems or a cyber security breach, we could experience an adverse effect on our operations, we could be subject to costly government enforcement action and private litigation and our reputation could suffer.
Our operations, especially our retail operations, involve the storage and transmission of our customers’ and consumers’ proprietary information, such as credit card and bank account numbers, and security breaches could expose us to a risk of loss of this information, government enforcement action and litigation and possible liability. Our payment services may be susceptible to credit card and other payment fraud schemes, including unauthorized use of credit cards, debit cards or bank account information, identity theft or merchant fraud.
If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and as a result, someone obtains unauthorized access to our customers’ and consumers’ data, our reputation may be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs, the public perception of the effectiveness of our security measures could be harmed and we could lose customers and consumers, which could adversely affect our business.
We also rely extensively on our computer systems to manage our ordering, pricing, inventory replenishment and other processes. Our systems could be subject to damage or interruption from various sources, including power outages, computer and telecommunications failures, computer viruses, cyber security breaches, vandalism, severe weather conditions, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities. If our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and we may experience loss of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business, financial condition or results of operations.
We are exposed to risks associated with acquisitions, which could adversely affect our future financial results.
Our business strategy includes growth through acquisitions or other transactions. We have completed three strategic acquisitions since the Spin-Off. Acquisitions involve a number of risks. The expected benefits of any future acquisitions or other transactions may not be realized. Costs could be incurred on pursuits or proposed acquisitions that have not yet or may not close that could significantly impact our business, financial condition or results of operations. Additionally, after any acquisition, unforeseen issues could arise that adversely affect our anticipated returns or that are otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual results of operations may vary significantly from initial estimates. For example, in fiscal year 2015 we recorded an impairment to the goodwill associated with our acquisition of the Savage business, which impairment related to the market correction then impacting demand for firearms. Furthermore, we may engage in other strategic business transactions. Such transactions could cause unanticipated costs and difficulties, may not achieve intended results and may require significant time and attention from management, which could have an adverse impact on our business, financial condition or results of operations.
Risks associated with our acquisitions also include costs and difficulties related to the integration of acquired companies with our operations and unanticipated liabilities or contingencies. For example, we are currently involved in litigation in connection with the Bushnell acquisition, pursuant to which we have sued the seller of Bushnell in connection with the working capital purchase price adjustment.
Risks arising from our acquisitions also include a potential delay in adpoting our financial and managerial controls and reporting systems and procedures, greater than anticipated costs and expenses related to the integration of the acquired business with our business, potential unknown liabilities associated with the acquired company, challenges inherent in effectively managing an increased number of employees in diverse locations and the challenge of creating uniform standards, controls, procedures, policies, and information systems. These and other risks relating to our acquisitions could have an adverse effect on our business, financial condition or results of operations.
Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation would likely have an adverse effect on our business.
Our brand recognition and reputation are critical aspects of our business. We believe that maintaining and enhancing our brands as well as our reputation are critical to retaining existing customers and attracting new customers. We also believe that the importance of our brand recognition and reputation will continue to increase as competition in the markets in which we compete continues to develop.
Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our advertising, promotion, public relations and marketing programs. These brand promotion activities may not yield increased revenue and the effectiveness of these activities will depend on a number of factors, including our ability to:
• determine the appropriate creative message, media mix and markets for advertising, marketing and promotional initiatives and expenditures;
• identify the most effective and efficient level of spending in each market, medium and specific media vehicle; and
• effectively manage marketing costs, including creative and media expenses, in order to maintain acceptable customer acquisition costs.
If we implement new marketing and advertising strategies, we may utilize marketing and advertising channels with significantly higher costs than our current channels, which could adversely affect our results of operations. Implementing new marketing and advertising strategies could also increase the risk of devoting significant capital and other resources to endeavors that do not prove to be cost effective. We also may incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses, and our marketing and advertising expenditures may not generate sufficient levels of brand awareness or result in increased revenue. Even if our marketing and advertising expenses result in increased revenue, the increase in revenue might not offset our related marketing and advertising expenditures. If we are unable to maintain our marketing and advertising channels on cost-effective terms or replace or supplement existing marketing and advertising channels with similarly or more cost-effective channels, our marketing and advertising expenses could increase substantially, our customer base could be adversely affected and our business, financial condition or results of operations could be adversely impacted.
In addition, certain of our products and brands benefit from endorsements and support from particular sportsmen, athletes or other celebrities, and those products and brands may become personally associated with those individuals. As a result, sales of the endorsed products could be materially and adversely affected if any of those individuals’ images, reputations or popularity were to be negatively impacted.
We may incur substantial litigation costs to protect our intellectual property, and if we are unable to protect our intellectual property, we may lose our competitive advantage. We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.
Our future success depends in part upon our ability to protect our intellectual property. Our protective measures, including patents, trademarks, copyrights, trade secret protection and internet identity registrations, may prove inadequate to protect our proprietary rights and market advantage. The right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers. The scope of any patent to which we have or may obtain rights may not prevent others from developing and selling competing products. In addition, our patents may be held invalid upon challenge, or others may claim rights in, or ownership of, our patents. Moreover, we may become subject to litigation with parties that claim, among other matters, that we infringed their patents or other intellectual property rights. The defense and prosecution of patent and other intellectual property claims are both costly and time-consuming, and could result in a material adverse effect on our business and financial position.
Also, any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management's attention from our business. If our products were found to infringe a third party's proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. Rights holders may demand payment for past infringements or force us to accept costly license terms or discontinue use of protected technology or works of authorship.
We may become involved in litigation regarding patents and other intellectual property rights. Other companies, including our competitors, may develop intellectual property that is similar or superior to our intellectual property, duplicate our intellectual property or design around our patents, and may have or obtain patents or other proprietary rights that would prevent, limit or interfere with our ability to make, use or sell our products. Effective intellectual property protection may be unavailable or limited in some foreign countries in which we sell products or from which competing products may be sold.
Unauthorized parties may attempt to copy or otherwise use aspects of our intellectual property and products that we regard as proprietary. Our means of protecting our proprietary rights in the United States or abroad may prove to be inadequate, and competitors may be able to develop similar intellectual property independently. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the markets for our products.
Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions because our business would be harmed if we fail to enforce and protect our intellectual property rights. Even if the outcome is favorable, this proceeding could result in substantial costs to us and disrupt our business.
In the future, we also may need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition or results of operations.
Shortages of, and price increases for, components, parts, raw materials and other supplies may delay or reduce our sales and increase our costs, thereby harming our results of operations.
Although we manufacture many of the components for our products, we purchase from third parties some important components and parts, including but not limited to bolt carriers, rifle receivers, magazines, barrels, rifle stocks and bulk gun powder. The costs of these components and parts are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors that are not predictable or within our control. We also use numerous commodity materials in producing and testing our products, including copper, zinc, steel, wood, lead, and plastics. We cannot assure you that commodity prices will not increase, and any such increase in commodity prices may harm our results of operations.
Our inability to obtain sufficient quantities of components, parts, raw materials and other supplies from independent sources necessary for the production of our products could result in reduced or delayed sales or lost orders. Any delay in or loss of sales or orders could adversely impact our results of operations. Many of the components, parts, raw materials and other supplies used in the production of our products are available only from a limited number of suppliers. We do not have long-term supply contracts with some of these suppliers. As a result, we could be subject to increased costs, supply interruptions or orders and difficulties in obtaining materials. Our suppliers also may encounter difficulties or increased costs in obtaining the materials necessary to produce their products that we use in our products. The time lost in seeking and acquiring new sources could have an adverse effect on our business, financial condition or results of operations.
Increases in energy costs would increase our operating costs and could have an adverse effect on our earnings.
Higher prices for electricity, natural gas and fuel increase our production and shipping costs. A significant shortage, increased prices or interruptions in the availability of these energy sources would increase the costs of producing and delivering products to our customers, and would be likely to negatively affect our earnings. Energy costs have varied significantly during recent fiscal years and remain a volatile element of our costs.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack or other catastrophic event could cause delays in completing sales, providing services or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our results of operations.
In addition, damage or disruption to manufacturing and distribution capabilities of us or our suppliers because of a major earthquake, weather event, cyber-attack, terrorist attack or other catastrophic event could impair our ability to manufacture or sell our products. In addition, failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to
effectively manage such events if they occur, could have a material adverse effect on our business, financial condition or results of operations, as well as require additional resources to restore our supply chain.
Some of our products involve the manufacture or handling of a variety of explosive and flammable materials. From time to time, these activities have resulted in incidents that have temporarily shut down or otherwise disrupted some manufacturing processes, causing production delays and resulting in liability for workplace injuries and fatalities. We have safety and loss prevention programs that require detailed pre-construction reviews of process changes and new operations, along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies. We cannot assure you, however, that we will not experience similar incidents in the future or that any similar incidents will not result in production delays or otherwise have a material adverse effect on our business, financial condition or results of operations.
General economic conditions affect our results of operations.
Our revenues are affected by economic conditions and consumer confidence worldwide, but especially in the United States. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products. Moreover, our businesses are cyclical in nature, and their success is impacted by general economic conditions and specific economic conditions affecting the regions and markets we serve, the overall level of consumer confidence in the economy and discretionary income levels. Any substantial deterioration in general economic conditions that diminishes consumer confidence or discretionary income could reduce our sales and adversely affect our financial results. Moreover, declining economic conditions create the potential for future impairments of goodwill and other intangible and long-lived assets that may negatively impact our financial condition or results of operations. The impact of weak consumer credit markets, corporate restructurings, layoffs, high unemployment rates, declines in the value of investments and residential real estate, higher fuel prices and increases in federal and state taxation all can negatively affect our results of operations.
In addition, in recent periods sluggish economies and consumer uncertainty regarding future economic prospects in our key markets have had an adverse effect on the financial health of certain of our customers, which may in turn have a material adverse effect on our results of operations and financial condition. We extend credit to our customers for periods of varying duration based on an assessment of the customer’s financial condition, generally without requiring collateral, which increases our exposure to the risk of uncollectable receivables. In addition, we face increased risk of order reduction or cancellation when dealing with financially ailing retailers or retailers struggling with economic uncertainty. We may reduce our level of business with customers and distributors experiencing financial difficulties and may not be able to replace that business with other customers, which could have a material adverse effect on our financial condition, results of operations or cash flows.
Failure to attract and retain key personnel could have an adverse effect on our results of operations.
Our future success will depend in part on the continued service of key personnel and our ability to attract, retain and develop key managers, designers, sales and information technology professionals and others. We face intense competition for these individuals worldwide, and there is a significant concentration of our competitors in and around our headquarters in Farmington, Utah. We may not be able to attract qualified new employees or retain existing employees, which may have a material adverse effect on our financial condition, results of operations or cash flows.
In addition, our ability to maintain our competitive position is dependent to a large degree on the efforts and skills of our senior management team, including Mark DeYoung, our Chairman and Chief Executive Officer, and Stephen Nolan, our Senior Vice President and Chief Financial Officer. The loss of Mr. DeYoung, Mr. Nolan or one or more members of our senior management may significantly impair our business. In addition, many of our senior executives have strong industry reputations, which aid us in identifying commercial, financing and strategic acquisition opportunities, and having such opportunities brought to us. The loss of the services of one or more of these key personnel could materially and adversely affect our operations because of diminished relationships with customers, lenders and industry participants.
Our results of operations could be impacted by unanticipated changes in tax provisions or exposure to additional income tax liabilities.
Our business operates in many locations under government jurisdictions that impose income taxes. Changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain revenues or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. In addition, audits by income tax authorities could result in unanticipated increases in our income tax expense.
We may need to raise additional capital, and we cannot be sure that additional financing will be available.
We need to fund our ongoing working capital, capital expenditure and financing requirements through cash flows from operations and new sources of financing. Our ability to obtain future financing will depend, among other things, on our financial condition or results of operations as well as on the condition of the capital markets or other credit markets at the time we seek financing. Increased volatility and disruptions in the financial markets could make it more difficult and more expensive for us to obtain financing. We cannot assure you that we will have access to the capital markets on terms we find acceptable or at all.
The terms of the agreements governing our debt restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industries in which we operate, the economy and governmental regulations.
Our debt covenants may limit our ability to complete acquisitions, incur debt, make investments, sell assets, merge or complete other significant transactions.
Our 2016 Credit Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries and limits our ability to engage in actions that may be in our long-term best interests, including restrictions on our and our subsidiaries' ability to:
• incur or guarantee additional indebtedness or sell disqualified or preferred stock;
• pay dividends on, make distributions in respect of, repurchase or redeem, capital stock;
• make investments or acquisitions;
• sell, transfer or otherwise dispose of certain assets;
• create liens;
• enter into sale/leaseback transactions;
• enter into agreements restricting the ability to pay dividends or make other intercompany transfers;
• consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries' assets;
• enter into transactions with affiliates;
• prepay, repurchase or redeem certain kinds of indebtedness;
• issue or sell stock of our subsidiaries; and
• significantly change the nature of our business.
The indenture governing our 5.875% Senior Notes due 2023 (the “5.875% Notes”) also contains many of these same restrictions.
In addition, the 2016 Credit Agreement has financial covenants that require us to maintain a consolidated interest coverage ratio (as defined in the 2016 Credit Agreement) of not less than 3.00 to 1.00 and to maintain a consolidated leverage ratio (as defined in the 2016 Credit Agreement) of 3.50 to 1.00 or less.
As a result of all of these restrictions, we may be:
• limited in how we conduct our business and pursue our strategy;
• unable to raise additional debt or equity financing that we may require to operate during general economic or business downturns; or
• unable to compete effectively or to take advantage of new business opportunities.
A failure to comply with the covenants in the 2016 Credit Agreement could result in an event of default under the 2016 Credit Agreement, which could allow the creditors to accelerate the related indebtedness and proceed against the collateral that secures the indebtedness. Similarly, a failure to comply with the covenants in the indenture governing our 5.875% Notes could result in an event of default, which could allow the holders of the 5.875% Notes to accelerate these notes. The 2016 Credit Agreement and the indenture governing the 5.875% Notes contain cross-default provisions so that noncompliance with the covenants within one debt agreement could cause a default under other debt agreements as well. In the event our creditors accelerate the repayment of our borrowings, we may not have sufficient liquidity to repay our indebtedness in such circumstances.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
A significant portion of our long-term indebtedness consists of term loans with variable rates of interest that expose us to interest rate risk. Furthermore, any amounts drawn under the revolving credit facility available under our 2016 Credit Agreement will accrue interest at variable rates. If interest rates increase, our debt service obligations on our variable rate indebtedness will increase even if the amount borrowed remains the same, and our net income and cash flows will correspondingly decrease. With $720,000 of indebtedness as of April 1, 2016 outstanding under the 2016 Credit Agreement, a change of 1/8 of one percent in interest rates on our variable rate indebtedness would result in a $0.9 million change in annual estimated interest expense. Even if we enter into interest rate swaps in the future in order to reduce future interest rate volatility, we may not fully mitigate our interest rate risk.
Fluctuations in foreign currency exchange rates may adversely affect our financial results.
During the fiscal year ended March 31, 2016, approximately 15% of our revenue was generated from sales outside the United States. This revenue (and the related expense) is often transacted in foreign currencies or valued based on a currency other than U.S. dollars. For the purposes of financial reporting, this revenue is translated into U.S. dollars. Resulting gains and losses from foreign currency fluctuations are therefore included in our consolidated and combined financial statements. As a result, when the U.S. dollar strengthens against certain foreign currencies, including the Euro, Australian dollar, British pound sterling, Canadian dollar and other major currencies, as it did in calendar 2015, our reportable revenue in U.S. dollars generated from sales made in foreign currencies may decrease substantially. As a result, we are exposed to foreign currency exchange rate fluctuations, which could have an adverse effect on our financial condition, results of operations and cash flows.
A portion of our workforce belongs to a union. Failure to successfully negotiate or renew the collective bargaining agreement, or any strikes, slow-downs or other labor-related disruptions, could adversely affect our operations and could result in increased costs that impair our financial performance.
Approximately 6.0% of our employees are covered by a collective bargaining agreement, which expires on June 30, 2017. Strikes, slow-downs or other labor-related disruptions could occur if we are unable to either negotiate or renew our collective bargaining agreement on satisfactory terms, which could adversely impact our results of operations. The terms and conditions of new or renegotiated agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency.
Risks Relating to the Spin-Off and Ownership of our Common Stock
We may be unable to take certain actions because such actions could jeopardize the tax-free status of the Spin-Off or the Merger, and such restrictions could be significant.
Under the Tax Matters Agreement entered into by Orbital ATK and Vista Outdoor, we are prohibited from taking actions that could reasonably be expected to cause the Spin-Off to be taxable or to jeopardize the conclusions of the opinions of counsel received by Orbital ATK.
In particular, for two years after the Spin-Off, we may not:
• liquidate, whether by merger, consolidation or otherwise;
• redeem or otherwise repurchase our capital stock, subject to certain exceptions provided by the Tax Matters Agreement including the recently approved share repurchase program;
• cease to be engaged in the active conduct of, or sell or transfer more than 30% of the gross assets or gross consolidated assets of, the sporting business; or
• enter into any agreement, understanding or arrangement or engage in any substantial negotiations with respect to any transaction involving the acquisition, issuance, repurchase or change of ownership of 30% or more of our capital stock, in each case together with options or other rights in respect of that capital stock, subject to certain exceptions relating to employee compensation arrangements, open market stock repurchases and stockholder rights plans.
If the Spin-Off does not qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code (the "Code"), including as a result of subsequent acquisitions of our stock, then we may be obligated to indemnify Orbital ATK for such taxes imposed on the combined company. We are permitted to take any of the actions described above only if we obtain an opinion of counsel that is reasonably acceptable to Orbital ATK (or an IRS private letter ruling) to the effect that the action will not affect the tax-free status of the Spin-Off, the Merger or certain related transactions. Such a ruling or opinion may not be obtainable, however. In addition, the receipt of any such opinion or IRS ruling in respect of an action we propose to take will not relieve us of any obligation it has to indemnify Orbital ATK if such action causes the Spin-Off, Merger or certain related transactions to be taxable to Orbital ATK.
Because of these restrictions, for two years after the Spin-Off, we may be limited in the amount of capital stock we can issue to make acquisitions or to raise additional capital. Also, our indemnity obligation to Orbital ATK may discourage, delay or prevent a third party from acquiring control of Vista Outdoor during this two-year period in a transaction that stockholders of Vista Outdoor might consider favorable.
Provisions of our Amended and Restated Certificate of Incorporation, our Amended and Restated Bylaws, the Tax Matters Agreement and Delaware law may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.
Several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and Delaware law may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable. These include provisions that:
• permit us to issue preferred stock;
• forbid our stockholders to act by written consent and require that stockholder action must take place at a duly called annual or special meeting of our stockholders;
• establish how stockholders may present proposals or nominate directors for election at meetings of our stockholders;
• divide our board of directors into three classes, with each class serving a staggered three-year term, which could have the effect of making the replacement of incumbent directors more time consuming and difficult;
• mandate that stockholders may only remove directors for cause;
• grant exclusive privilege (subject to certain limited exceptions) to our directors, and not our stockholders, to fill vacancies on our board of directors;
• provide that only our board of directors, Chairman of our board of directors, our Chief Executive Officer or the President (in the absence of the Chief Executive Officer) are entitled to call a special meeting of our stockholders; and
• limit our ability to enter into business combination transactions with certain stockholders.
These and other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and Delaware law may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of us, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Facilities. As of March 31, 2016, we occupied manufacturing, assembly, warehouse, test, research, development, and office facilities having a total floor space of approximately 3.5 million square feet. These facilities are either owned or leased.
As of March 31, 2016, our operating segments had significant operations at the following locations:
|
| | |
| | |
Shooting Sports | | Lewiston, ID; Westfield, MA; Anoka, MN |
Outdoor Products | | Oroville, CA; San Diego, CA; Lenexa, KS; Overland Park, KS; Olathe, KS; Flora, MS; Manhattan, MT; Lares, PR |
Corporate | | Clearfield, UT; Anoka, MN |
The following table summarizes the floor space, in thousands of square feet, occupied by each operating segment as of March 31, 2016:
|
| | | | | | | | |
| Owned | | Leased | | Total |
Shooting Sports | 1,567 |
| | 221 |
| | 1,788 |
|
Outdoor Products | 151 |
| | 1,426 |
| | 1,577 |
|
Corporate | — |
| | 116 |
| | 116 |
|
Total | 1,718 |
| | 1,763 |
| | 3,481 |
|
Percentage of total | 49 | % | | 51 | % | | 100 | % |
Our properties are well maintained and in good operating condition and are sufficient to meet our near-term operating requirements.
ITEM 3. LEGAL PROCEEDINGS
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. Notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular quarter, 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 future operating results, financial condition, or cash flows.
We also have been identified as a PRP, along with other parties, in regulatory agency actions associated with hazardous waste sites. As a PRP, we may be required to pay a share of the costs of the investigation and clean-up of these sites. 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 matters, individually or in the aggregate, will have a material adverse effect on our operating results, financial condition, or cash flows.
The description of certain environmental matters contained in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Contingencies" is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Vista Outdoor's common stock is listed and traded on the New York Stock Exchange under the symbol "VSTO". The Company's common stock started “regular-way” trading on the NYSE on February 10, 2015. Prior to February 10, 2015, there was no public market for our common stock. Our common stock was traded on a “when-issued” basis starting on January 29, 2015.
The trading price data, as reported on the NYSE for the indicated periods is as follows:
|
| | | | | | | | |
| | High | | Low |
Fiscal 2016: | | |
| | |
|
Quarter ended March 31, 2016 | | $ | 53.91 |
| | $ | 42.08 |
|
Quarter ended January 3, 2016 | | $ | 46.90 |
| | $ | 41.78 |
|
Quarter ended October 4, 2015 | | $ | 49.27 |
| | $ | 41.34 |
|
Quarter ended July 5, 2015 | | $ | 47.96 |
| | $ | 40.53 |
|
| | | | |
Fiscal 2015: | | | | |
January 29, 2015 - March 31, 2015 | | $ | 46.50 |
| | $ | 31.00 |
|
The number of holders of record of Vista Outdoor's common stock as of May 16, 2016 was 4,327.
We have not paid, and do not currently expect to pay, dividends on our common stock. Instead, we intend to retain our future earnings to finance the growth and development of our business and for working capital and general corporate purposes. The declaration and payment of dividends by us is subject to the discretion of the Board of Directors and depends on many factors including our financial condition, earnings, capital requirements, covenants associated with debt obligations, legal requirements, regulatory constraints and other factors deemed relevant by the Board of Directors. Therefore, there can be no assurance as to what level of dividends, if any, will be paid in the future. The discussion of limitations on the payment of dividends as a result of the 2016 Credit Agreement and the 5.875% Notes discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Liquidity," is incorporated herein by reference.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights, and vesting of restricted stock units and deferred compensation under our 2014 Stock Incentive Plan as of March 31, 2016:
|
| | | | | | | | | | |
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
Equity compensation plans approved by security holders: | | | | | | |
2014 Stock Incentive Plan(1) | | |
| | |
| | 4,792,877 |
|
Stock Options | | 612,671 |
| | $ | 26.42 |
| | — |
|
Restricted Stock Units | | 266,821 |
| | — |
| | — |
|
Deferred Compensation (2) | | 48,069 |
| | — |
| | — |
|
Performance Awards(3) | | 312,282 |
| | — |
| | — |
|
Total | | 1,239,843 |
| | $ | — |
| | — |
|
__________________________________________________________
| |
(1) | The aggregate number of shares of Vista Outdoor common stock that may be issued under all stock-based awards granted under the Vista Outdoor 2014 Stock Incentive Plan is equal to the sum of (a) 5,750,000 and (b) 668,136 shares issuable pursuant to Vista Outdoor stock options and other equity awards granted in connection with the Spin-Off in respect of stock options and other equity based awards of OrbitalATK that were outstanding immediately prior to the Spin-Off, in each case as specified in the Transaction Agreement. |
| |
(2) | Shares reserved for payment of deferred stock units in accordance with the terms of the 2014 Stock Incentive Plan. |
| |
(3) | Shares reserved for issuance in connection with outstanding performance awards. The amount shown assumes the maximum payout of the performance shares based on achievement of the highest level of performance. The actual number of shares to be issued depends on the performance levels achieved for the respective performance periods. |
Issuer Repurchases of Equity Securities |
| | | | | | | | | | | | |
Period | Total Number of Shares Repurchased(1) | | Average Price Paid per Share | | Total Number of Shares Repurchased as Part of Publicly Announced Plan or Program | | Maximum Number of Shares that May Yet Be Repurchased Under the Plan or Program(2)* |
Fiscal Quarter Ended March 31, 2016 | | | | | | | |
January 4 - January 31 | 259,800 |
| | $ | 45.23 |
| | 259,800 |
| | |
February 1 - February 28 | 191,966 |
| | 46.58 |
| | 190,974 |
| | |
February 29 - March 31 | 178,617 |
| | 51.47 |
| | 120,876 |
| | |
Fiscal Quarter Ended March 31, 2016 | 630,383 |
| | $ | 47.41 |
| | 571,650 |
| | 981,061 |
|
| | | | | | | |
____________________________________________________________
* The maximum number of shares that may yet be repurchased under the program was calculated using the Vista Outdoor closing stock price of $51.91 on March 31, 2016.
| |
(1) | Included in the total number of shares repurchased were 58,733 shares withheld to pay taxes upon vesting of shares of restricted stock or payment of performance shares that were granted under our incentive compensation plans. |
| |
(2) | On February 25, 2015, our Board authorized the repurchase of up to up to $200 million worth of shares of our common stock, executable over the next two years. Under this program, we repurchased 3,179,086 and 162,000 shares for $142,200 and $6,870 in fiscal 2016 and 2015, respectively. The shares were purchased from time to time in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. The repurchase authorization also allowed the Company to make repurchases under Rule 10b5-1 of the Securities Exchange Act of 1934. |
Stockholder Return Performance Graph
The following graph compares, from January 29, 2015 (the first day our common stock began "when-issued" trading on the New York Stock Exchange) through the March 31, 2016 fiscal year end, the cumulative total return for Vista Outdoor common stock with the comparable cumulative total return of two indexes:
| |
• | Standard & Poor's Composite 500 Index, a broad equity market index; and |
| |
• | Standard & Poor's Mid-Cap 400 Index, an equity market index for entities with similar capitalization levels. |
The Standard & Poor's Mid-Cap 400 Index was chosen because there is not currently a published industry index that we believe would offer a meaningful comparison.
Vista Outdoor common stock began “regular-way” trading in connection with the Spin-Off on February 10, 2015. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. “Regular-way” trading refers to trading after a security has been issued. The graph is not, and is not intended to be, indicative of future performance of our common stock. This graph is not deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.
The graph assumes that on January 29, 2015, $100 was invested in Vista Outdoor common stock (at the closing price on that trading day) and in each of the indexes. The comparison assumes that all dividends, if any, were reinvested.
ITEM 6. SELECTED FINANCIAL DATA
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended March 31 |
(Amounts in thousands except per share data) | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
Results of Operations | | | | | | | | | |
Sales | $ | 2,270,734 |
| | $ | 2,083,414 |
| | $ | 1,873,919 |
| | $ | 1,196,031 |
| | $ | 1,042,914 |
|
Cost of sales | 1,651,289 |
| | 1,554,493 |
| | 1,406,616 |
| | 953,593 |
| | 850,506 |
|
Gross profit | 619,445 |
| | 528,921 |
| | 467,303 |
| | 242,438 |
| | 192,408 |
|
Operating expenses: | |
| | |
| | |
| | |
| | |
|
Research and development | 12,512 |
| | 9,518 |
| | 13,984 |
| | 8,720 |
| | 7,497 |
|
Selling, general, and administrative | 344,175 |
| | 283,029 |
| | 219,512 |
| | 132,263 |
| | 106,816 |
|
Goodwill and tradename impairment (1) | — |
| | 52,220 |
| | — |
| | — |
| | 47,791 |
|
Income before interest and income taxes | 262,758 |
| | 184,154 |
| | 233,807 |
| | 101,455 |
| | 30,304 |
|
Interest (expense) income, net | (24,351 | ) | | (30,108 | ) | | (15,469 | ) | | 7 |
| | 3 |
|
Income before income taxes | 238,407 |
| | 154,046 |
| | 218,338 |
| | 101,462 |
| | 30,307 |
|
Income tax provision | 91,370 |
| | 74,518 |
| | 85,081 |
| | 36,770 |
| | 19,647 |
|
Net income | $ | 147,037 |
| | $ | 79,528 |
| | $ | 133,257 |
| | $ | 64,692 |
| | $ | 10,660 |
|
Vista Outdoor Inc.'s earnings per common share: | |
| | |
| | |
| | |
| | |
|
Basic (2) | $ | 2.36 |
| | $ | 1.25 |
| | $ | 2.09 |
| | $ | 1.01 |
| | $ | 0.17 |
|
Diluted (2) | $ | 2.35 |
| | $ | 1.25 |
| | $ | 2.09 |
| | $ | 1.01 |
| | $ | 0.17 |
|
Financial Position | |
| | |
| | |
| | |
| | |
|
Net current assets | $ | 680,763 |
| | $ | 706,806 |
| | $ | 451,623 |
| | $ | 186,075 |
| | $ | 169,917 |
|
Net property, plant, and equipment | 203,485 |
| | 190,607 |
| | 189,071 |
| | 123,604 |
| | 118,225 |
|
Total assets | 2,942,634 |
| | 2,512,446 |
| | 2,399,798 |
| | 782,935 |
| | 734,939 |
|
Long-term debt (including current portion) | 670,287 |
| | 339,665 |
| | 1,003,535 |
| | — |
| | — |
|
Vista Outdoor Inc. stockholders' equity | 1,660,167 |
| | 1,648,764 |
| | 870,731 |
| | 531,900 |
| | 520,305 |
|
Other Data | |
| | |
| | |
| | |
| | |
|
Depreciation and amortization of intangible assets | $ | 72,614 |
| | $ | 66,551 |
| | $ | 44,902 |
| | $ | 25,128 |
| | $ | 24,490 |
|
Capital expenditures(3) | 41,526 |
| | 43,189 |
| | 40,234 |
| | 23,395 |
| | 23,611 |
|
Operating margin(4) | 11.6 | % | | 8.8 | % | | 12.5 | % | | 8.5 | % | | 2.9 | % |
_________________________________________________
| |
(1) | In fiscal 2015, we recorded a non-cash asset impairment charge of $52.2 million related to the firearms reporting unit and in fiscal 2012 we recorded an impairment to the goodwill associated with the fiscal year 2009 acquisition of the Eagle military accessories business. See Note 8 to the consolidated and combined financial statements for further detail. |
| |
(2) | For periods prior to February 9, 2015 we have used weighted average shares of 63,875,000 to calculate basic and diluted EPS, as we had no outstanding common shares or dilutive stock-based awards. 63,875,000 represents the number of shares issued upon the Spin-Off. |
| |
(3) | Capital expenditures are shown net of capital expenditures included in accounts payable and financed through operating leases. |
| |
(4) | Represents income before interest and income taxes expressed as a percentage of sales. |
See Note 3 to the consolidated and combined financial statements for a description of acquisitions made since the beginning of fiscal 2014.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands except share and per share data or unless otherwise indicated)
Forward-Looking Information is Subject to Risk and Uncertainty
This Annual Report on Form 10-K contains "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Forward-looking statements speak only as of the date they are made and give our current expectations or forecasts of future events. Words such as "may," "expected," "intend," "estimate," "anticipate," "believe," "project," or "continue," and similar expressions are used to identify forward-looking statements within the meaning of the Reform Act. These forward-looking statements are based on management's current expectations and assumptions regarding our business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. We caution you not to place undue reliance on any forward-looking statements. Numerous risks, uncertainties and other factors could cause our actual results to differ materially from expectations described in such forward-looking statements, including the following:
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• | general economic and business conditions in the United States and our other markets, including conditions affecting employment levels, consumer confidence and spending; |
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• | our ability to attract and retain key personnel and maintain and grow our relationships with customers, suppliers and other business partners; |
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• | our ability to adapt our products to changes in technology, the marketplace and customer preferences; |
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• | our ability to maintain and enhance brand recognition and reputation; |
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• | reductions, unexpected changes in or our inability to accurately forecast demand for ammunition, firearms or other outdoor sports and recreation products; |
| |
• | risks associated with our sales to significant retail customers, including unexpected cancellations, delays and other changes to purchase orders; |
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• | supplier capacity constraints, production disruptions or quality or price issues affecting our operating costs; |
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• | our competitive environment; |
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• | risks associated with compliance and diversification into international and commercial markets; |
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• | the supply, availability and costs of raw materials and components; |
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• | increases in commodity, energy and production costs; |
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• | changes in laws, rules and regulations relating to our business, such as federal and state firearms and ammunition regulations; |
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• | our ability to execute our long-term growth strategy, including our ability to complete and realize expected benefits from acquisitions and integrate acquired businesses; |
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• | our ability to take advantage of growth opportunities in international and commercial markets; |
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• | foreign currency exchange rates and fluctuations in those rates; |
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• | 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; |
| |
• | risks associated with cybersecurity and other industrial and physical security threats; |
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• | capital market volatility and the availability of financing; |
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• | changes to accounting standards or policies; and |
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• | changes in tax rules or pronouncements. |
It is not possible to predict or identify all such factors and the list above should not be considered to be a complete statement of all potential risks and uncertainties. New factors may emerge or changes to the foregoing factors may occur that would impact our business. Additional information regarding these factors is contained in Item 1A of this report and may also
be contained in our filings with the Securities and Exchange Commission on Forms 10-Q and 8-K. All such risk factors are difficult to predict, contain material uncertainties that may affect actual results, and may be beyond our control.
Executive Summary
We serve the outdoor sports and recreation markets through a diverse portfolio of over 40 well-recognized brands that provide consumers with a wide range of performance-driven, high-quality and innovative products, including sporting ammunition and firearms, outdoor accessories, outdoor sports optics, golf rangefinders, performance eyewear, hydration products, and stand up paddle boards. We serve a broad range of end consumers, including outdoor enthusiasts, hunters and recreational shooters, athletes, as well as law enforcement and military professionals. Our products are sold through a wide variety of mass, specialty and independent retailers, such as Bass Pro Shops, Cabela's, Dick's Sporting Goods, Gander Mountain, Recreational Equipment, Inc., Sportsman's Warehouse, Target and Walmart. We also sell certain of our products 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 end users.
As of March 31, 2016, we operated in two business segments. These operating segments are defined based on the reporting and review process used by the chief operating decision maker, Vista Outdoor's Chief Executive Officer. As of March 31, 2016, Vista Outdoor's two operating segments were:
| |
• | Shooting Sports, which generated 62% of our sales in fiscal year 2016. Shooting Sports product lines include centerfire ammunition, rimfire ammunition, shotshell ammunition, reloading components, centerfire rifles, rimfire rifles, shotguns and range systems. |
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• | Outdoor Products, which generated 38% of our sales in fiscal year 2016. The Outdoor Products product lines are archery/hunting accessories, global eyewear and sport protection, golf, hydration products, optics, shooting accessories, tactical products and water sports. Archery/hunting accessories include high-performance hunting arrows, game calls, hunting blinds, game cameras and waterfowl decoys. Global eyewear and sport protection products include safety and protective eyewear, as well as fashion and sports eyewear and helmets. Golf products include laser rangefinders. Hydration products include hydration packs and water bottles. Optics products include binoculars, riflescopes and telescopes. Shooting accessories products include reloading equipment, clay targets, and premium gun care products. Tactical products include holsters, duty gear, bags and packs. Water sports products include stand up paddle boards. |
Financial Highlights and Notable Events
Certain notable events or activities affecting our fiscal 2016 financial results and subsequent results included the following:
Financial highlights for fiscal 2016
| |
• | Annual sales of $2,270,734 and $2,083,414 for the fiscal years ended March 31, 2016 and 2015, respectively. The increase was driven by the acquisition of CamelBak and Jimmy Styks and increase in demand within the shooting sports market, partially offset by unfavorable foreign currency impacts. |
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• | Gross profit was $619,445 and $528,921 for the fiscal years ended March 31, 2016 and 2015, respectively. The increase was driven by the sales increase noted above, product mix, and favorable material procurement. |
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• | The decrease in the current year's tax rate to 38.3% from 48.4% in the year ended March 31, 2015 was primarily caused by the absence of the nondeductible goodwill impairment recorded in the prior year period and lower nondeductible transaction costs, partially offset by true-up of deferred taxes and income taxes payable. |
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• | On July 20, 2015, we completed the Jimmy Styks Acquisition, using $40,000 of cash on hand with additional contingent consideration payable if incremental profitability growth milestones are achieved over the next three years. |
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• | On August 3, 2015, we completed the acquisition of CamelBak Products, LLC (the "CamelBak Acquisition") for total consideration of $412,500, subject to a customary working capital adjustment, utilizing cash on hand and borrowings under our existing credit facilities. |
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• | On August 11, 2015, we issued $350,000 aggregate principal amount of 5.875% senior notes (the “Notes”) that mature on October 1, 2023. |
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• | During fiscal 2016, we repurchased 3,179,086 shares for $142,200. |
Notable events-Subsequent to year end
| |
• | On April 1, 2016, we completed the acquisition of BRG Sports Inc.’s Action Sports division, which was operated by Bell Sports Corp. The acquisition includes the market-leading brands Bell and Giro, as well as Blackburn, CoPilot, Krash and Raskullz. Under the terms of the transaction, we paid $400,000, subject to customary working capital adjustments, and additional contingent consideration payable if incremental profitability growth milestones within the Bell Powersports product line are achieved. |
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• | On April 1, 2016, in connection with the Action Sports Acquisition, we completed a refinancing of our senior secured credit facilities, under which our term loan balance was $332,500, by entering into new senior secured credit facilities consisting of a $400,000 revolving credit facility and a $640,000 term loan facility maturing April 1, 2021. We also drew $80,000 on our revolving credit facility to fund the purchase of Action Sports. |
Outlook
Shooting Sports market - The current year has seen an increase in the number of new long-gun background checks as evidenced by the NICS. This increase along with higher sales on a year-over-year basis within Shooting Sports in the back half of fiscal year 2016, indicates the market is stabilizing after the declines seen in fiscal years 2014 and 2015.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated and combined financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the consolidated and combined financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following are our critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated and combined financial statements.
Revenue Recognition
Revenue Recognition Methodology—Sales, net of estimates for discounts, returns, rebates, allowances, and excise taxes are recognized when persuasive evidence of an arrangement exists, all risks of ownership have been transferred, and payment is reasonably assured.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful receivables for estimated losses resulting from the inability of our trade customers to make required payments. We provide an allowance for specific customer accounts where collection is doubtful and also provide an allowance for customer deductions based on historical collection and write-off experience. Additional allowances would be required if the financial conditions of our customers deteriorated.
Inventories
Our inventories are valued at the lower of cost or market. We evaluate the quantities of inventory held against past and future demand and market conditions to determine excess or slow moving inventory. For those product classes of inventory identified, we estimate their market value based on current and projected selling prices. If the projected market value is less than cost, we provide an allowance to reflect the lower value of that inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold. The projected market value can decrease due to consumer preferences, legislation, or loss of key contracts among other events.
Income Taxes
Provisions for federal, state and foreign income taxes are calculated based on reported pre-tax earnings and current tax law. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. We periodically assess our liabilities and contingencies for all periods that are currently open to examination or have not been effectively settled based on the most current available information. Where it is not more likely than not that our tax position will be sustained, we record the entire resulting tax liability and when it is more likely than not of being sustained, we record our best estimate of the resulting tax liability. Any applicable interest and penalties related to these positions are also recorded in the consolidated and combined financial statements. To the extent our assessment of the tax outcome of these matters changes, such change in estimate will impact the income tax provision in the period of the change. It is our policy to record any interest and penalties related to income taxes as part of the income tax expense for financial reporting purposes. Deferred tax assets related to carryforwards are reduced by a valuation allowance when it is not more likely than not that the amount will be realized before expiration of the carryforward period. As part of this analysis, we take into account the amount and character to determine if the carryforwards will be realized. Significant estimates are required for this analysis. Changes in the amounts of valuation allowance are recorded in the tax provision in the period when the change occurs.
Acquisitions
The results of acquired businesses are included in our consolidated and combined financial statements from the date of acquisition. We allocate the purchase price of an acquired business to the underlying tangible and intangible acquired assets and liabilities assumed based on their fair value. Estimates are used in determining the fair value and estimated remaining lives of intangible assets until the final purchase price allocation is completed. Actual fair values and remaining lives of intangible assets may vary from those estimates. The excess purchase price over the estimated fair value of the net assets acquired is recorded as goodwill.
On June 21, 2013, we acquired Savage Arms, a leading manufacturer of sporting long guns. Operating under the brand names of Savage Arms, Stevens and Savage Range Systems, the company designs, manufactures and markets centerfire and rimfire rifles, shotguns and shooting range systems used for hunting as well as competitive and recreational target shooting. Savage Arms is included within the Shooting Sports segment. The purchase price was $315,000 net of cash acquired. We believe the acquisition complemented our growing portfolio of leading consumer brands and allowed us to build upon offerings with Savage Arms' prominent, respected brands known for accuracy, quality, innovation, value and craftsmanship. Savage Arms' sales distribution channels, new product development, and sophistication in manufacturing significantly increased our presence with a highly relevant product offering to distributors, retailers and consumers. Savage Arms employed approximately 400 employees at acquisition. The purchase price allocation was completed during the first quarter of fiscal 2015. None of the goodwill generated in this acquisition will be deductible for tax purposes.
On November 1, 2013, we acquired Bushnell. Bushnell is a leading global designer, marketer and distributor of branded sports optics, outdoor accessories and eyewear. Bushnell is included within the Outdoor Products segment. The purchase price was $985,000 net of cash acquired, subject to customary post-closing adjustments. We believe the acquisition broadened our existing capabilities in the commercial shooting sports market and expanded our portfolio of branded shooting sports products. In addition, this transaction enabled us to enter new sporting markets in golf and snow sports. We have leveraged Bushnell’s strong sourcing, marketing, branding and distribution capabilities and capitalized on Bushnell’s track record of successfully integrating acquisitions and delivering profitable growth. Bushnell employed approximately 1,100 employees at acquisition. The purchase price allocation was completed during the third quarter of fiscal year 2015. A portion of the goodwill generated in this acquisition will be deductible for tax purposes. The total amount of goodwill related to the acquisition expected to be deductible for tax purposes is $19,095.
On July 20, 2015, we completed the acquisition of Jimmy Styks, LLC ("Jimmy Styks"), using $40,000 of cash on hand with additional contingent consideration payable if incremental profitability growth milestones are achieved over the next three years. We determined a value of the future contingent consideration as of the acquisition date of $4,471 utilizing the Black Scholes option pricing model; the total amount paid may differ from this value. The option pricing model requires us to make assumptions including the risk-free rate, expected volatility, cash flows, and expected life. The risk-free rate is based on U.S. Treasury zero-coupon issues with a remaining term that approximates the expected life assumed at the date of the acquisition. The expected option life is based on the contractual term of the agreement. Expected volatility is based on the average volatility of similar public companies' stock over the past three years. The discounted cash flows are based on our estimates of future performance of the business.
Jimmy Styks is a leading designer and marketer of stand up paddle boards and related accessories. Jimmy Styks’ stand up paddle board portfolio provides easy-to-use platforms for water sport enthusiasts engaging in activities ranging from personal fitness to fishing and will help us expand our Outdoor Products operating segment. Jimmy Styks offers nearly 30 SKUs in epoxy, inflatable, soft and thermoform boards, as well as accessories. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. The majority of the goodwill generated in this acquisition will be deductible for tax purposes. Jimmy Styks is an immaterial acquisition to our company.
On August 3, 2015, we completed the acquisition of CamelBak Products, LLC ("CamelBak") for total consideration of $412,500, subject to a customary working capital adjustment, utilizing cash on hand and borrowings under our credit facilities. CamelBak is the leading provider of personal hydration solutions for outdoor, recreation and military use.
CamelBak’s products include hydration packs, reusable bottles and individual water purification and filtration systems. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. A portion of the goodwill generated in this acquisition will be deductible for tax purposes.
Accounting for Goodwill and Indefinite Lived Intangible Assets
We test goodwill and indefinite lived intangible assets for impairment on the first day of our fourth fiscal quarter or upon the occurrence of events or changes in circumstances that indicate that the asset might be impaired. We have determined that the reporting units on a standalone basis for our goodwill impairment review are our operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available, and for which segment management regularly reviews the operating results. We then evaluate these components to determine if they are similar and should be aggregated into one reporting unit for testing purposes. Based on this analysis, we have identified four reporting units, as of the fiscal 2016 testing date.
The goodwill impairment test is performed using a two-step process. In the first step, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reporting unit, including goodwill. If the carrying amount of a reporting unit is higher than its estimated fair value, an indication of impairment exists and the second step must be performed in order to determine the amount of the impairment. In the second step, we must determine the implied fair value of the reporting unit's goodwill, which is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The implied fair value is compared to the carrying amount and if the carrying amount of the reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss must be recognized for the excess.
The fair value of each reporting unit is determined using both an income and market approach. The value estimated using a discounted cash flow model is weighted against the estimated value derived from the guideline company market approach method. This market approach method estimates the price reasonably expected to be realized from the sale of the company based on comparable companies.
In developing the discounted cash flow analysis, our assumptions about future revenues and expenses, capital expenditures, and changes in working capital are based on our plan, as reviewed by the Board of Directors, and assume a terminal growth rate thereafter. A separate discount rate is determined for each reporting unit and these cash flows are then discounted to determine the fair value of the reporting unit.
Our identifiable intangibles with indefinite lives consist of certain trademarks and trade names ("tradenames"). The impairment test consists of a comparison of the fair value of the specific tradename with its carrying value. The fair value of these assets are measured using the relief-from-royalty method which assumes that the asset has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires that we estimate the future revenue for the related brands and technology, the appropriate royalty rate, and the weighted average cost of capital. We base our fair values and estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. If the carrying amount of a tradename is higher than its fair value, an impairment exists and the asset would be recorded at the fair value.
Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital, and the appropriate discount rate. The projections also take into account several factors including current and estimated economic trends and outlook, costs of raw materials and other factors that are beyond our control. If the current economic conditions were to deteriorate, or if we were to lose significant business, causing a reduction in estimated discounted cash flows, it is possible that the estimated fair value of certain reporting units or tradenames could fall below their carrying value resulting in the necessity to conduct additional impairment tests in future
periods. We continually monitor the reporting units and tradenames for impairment indicators and update assumptions used in the most recent calculation of the estimated fair value of a reporting unit or tradenames as appropriate.
Results of our fiscal year 2016 Impairment Test
For the fiscal year 2016 goodwill impairment assessment performed as of January 4, 2016, we utilized estimated cash flows from our plan and assumed a terminal growth rate thereafter of 3%. The cash flows were then discounted using a separate discount rate for each reporting unit which ranged from 8% to 10%. An assumed value was also determined using multiples by comparing operating results from guideline companies.
The results of our fiscal year 2016 goodwill impairment test indicated that the estimated fair value of reporting units tested exceeded their carrying value by more than 10%, which we deem to be a sufficient excess.
For the fiscal year 2016 tradenames impairment assessment performed as of January 4, 2016, we utilized estimated revenues from our plan and assumed a royalty rate of 3% to 6% and a terminal growth rate thereafter of 3%. The cash flows were then discounted using a separate discount rate for each tradename which ranged from 9% to 11%. All indefinite intangible assets tested had a fair value that was significantly in excess of carrying value which we define as greater than 10%.
Results of Operations
The following information should be read in conjunction with our consolidated and combined financial statements. The key performance indicators that our management uses in managing the business are sales, gross profit and cash flows.
Segment total net sales, cost of sales and gross profit exclude intercompany sales and profit.
Fiscal 2016
Sales
The following is a summary of each operating segment's sales:
|
| | | | | | | | | | | | | | |
| Years Ended March 31 | | | | |
| 2016 | | 2015 | | $ Change | | % Change |
Shooting Sports | $ | 1,408,973 |
| | $ | 1,353,092 |
| | $ | 55,881 |
| | 4.1 | % |
Outdoor Products | 861,761 |
| | 730,322 |
| | 131,439 |
| | 18.0 | % |
Total sales | $ | 2,270,734 |
| | $ | 2,083,414 |
| | $ | 187,320 |
| | 9.0 | % |
The overall fluctuation in net sales was driven by the changes within the operating segments as described below.
Shooting Sports. The increase in sales was primarily driven by increases in firearm and rimfire ammunition volume, partially offset by decreases in shotshell volume. The volumes in the back half of fiscal 2016 improved as market demand stabilized.
Outdoor Products. The increase in sales was driven by sales of $121,285 from the acquisitions of CamelBak and Jimmy Styks, increased volumes in shooting accessories, golf, and optics partially offset by decreases in tactical products and unfavorable foreign exchange impacts.
Cost of Goods Sold and Gross Profit
The following is a summary of each operating segment's cost of goods sold and gross profit:
|
| | | | | | | | | | | | | | |
| Years Ended March 31 | | | | |
Cost of Goods Sold | 2016 | | 2015 | | $ Change | | % Change |
Shooting Sports | $ | 1,032,016 |
| | $ | 1,021,947 |
| | $ | 10,069 |
| | 1.0 | % |
Outdoor Products | 618,944 |
| | 530,279 |
| | 88,665 |
| | 16.7 | % |
Corporate | 329 |
| | 2,267 |
| | (1,938 | ) | | (85.5 | )% |
Total cost of sales | $ | 1,651,289 |
| | $ | 1,554,493 |
| | $ | 96,796 |
| | 6.2 | % |
|
| | | | | | | | | | | | | | |
| Years Ended March 31 | | | | |
Gross Profit | 2016 | | 2015 | | $ Change | | % Change |
Shooting Sports | $ | 376,957 |
| | $ | 331,145 |
| | $ | 45,812 |
| | 13.8 | % |
Outdoor Products | 242,817 |
| | 200,043 |
| | 42,774 |
| | 21.4 | % |
Corporate | (329 | ) | | (2,267 | ) | | 1,938 |
| | (85.5 | )% |
Total | $ | 619,445 |
| | $ | 528,921 |
| | $ | 90,524 |
| | 17.1 | % |
The overall fluctuation in cost of sales and gross profit was driven by the changes within the operating segments as described below.
Shooting Sports. The increase in gross profit was primarily driven by volume, product mix, raw material procurement favorability, and a previously announced rimfire ammunition price increase.
Outdoor Products. The increase in gross profit was primarily driven by $47,929 from the acquisitions of CamelBak and Jimmy Styks, increased sales volume, and increased promotional activities, partially offset by unfavorable foreign exchange impacts, unfavorable product mix and inventory related charges in the now closed Meridian, Idaho facility.
Corporate. The increase in corporate gross profit was caused by decreased foreign currency losses from the prior year.
Operating Expenses
|
| | | | | | | | | | | | | | | | | |
| Years Ended March 31 | | |
| 2016 | | As a % of Sales | | 2015 | | As a % of Sales | | Change |
Research and development | $ | 12,512 |
| | 0.6 | % | | $ | 9,518 |
| | 0.5 | % | | $ | 2,994 |
|
Selling, general and administrative | 344,175 |
| | 15.2 | % | | 283,029 |
| | 13.6 | % | | 61,146 |
|
Goodwill and tradename impairment | — |
| | — | % | | 52,220 |
| | 2.5 | % | | (52,220 | ) |
Total | $ | 356,687 |
| | 15.8 | % | | $ | 344,767 |
| | 16.6 | % | | $ | 11,920 |
|
Operating expenses increased by $11,920. Research and development costs increased due to the acquisitions of CamelBak and Jimmy Styks. Selling, general and administrative expenses increased primarily due to the acquisitions of CamelBak and Jimmy Styks, stand-alone public company costs incurred subsequent to the Spin-Off, stock-based compensation, and increased investment in selling and marketing efforts, partially offset by lower merger and acquisition transaction expenses in the current year compared to the prior year. These increases were partially offset by the absence of a $52,220 pre-tax non-cash impairment charge ($41,020 impairment to goodwill and $11,200 impairment to tradename) recorded in the fiscal year ended March 31, 2015.
Net Interest Expense
|
| | | | | | | | | | | | | | |
| Years Ended March 31 | | | | |
| 2016 | | 2015 | | $ Change | | % Change |
Interest expense | $ | 24,351 |
| | $ | 30,108 |
| | $ | (5,757 | ) | | (19.1 | )% |
The decrease in interest expense was due to our debt balances being lower than those allocated to us by Orbital ATK in the prior year period, partially offset by a higher average interest rate.
Income Tax Provision
|
| | | | | | | | | | | | | | | | | |
| Years Ended March 31 | | |
| 2016 | | Effective Rate | | 2015 | | Effective Rate | | Change |
Income tax provision | $ | 91,370 |
| | 38.3 | % | | $ | 74,518 |
| | 48.4 | % | | $ | 16,852 |
|
The decrease in the current period tax rate is primarily due to the absence of the nondeductible goodwill impairment recorded in the prior year period and lower nondeductible transaction costs, partially offset by true-up of deferred taxes and income taxes payable.
Our provision for income taxes includes federal, state and foreign income taxes. The effective tax rate for fiscal 2016 of 38.3% differs from the federal statutory rate of 35.0% primarily due to state income taxes and true-up of deferred and payable taxes, partially offset by DMD, which decreased the rate.
The effective tax rate for fiscal year 2015 of 48.4% differs from the federal statutory rate of 35.0% due to the nondeductible goodwill impairment, state income taxes and nondeductible transaction costs, partially offset by DMD and true-up of prior year taxes, which decreased the rate.
We entered into a Tax Matters Agreement with Orbital ATK that governs the respective rights, responsibilities and obligations of Vista Outdoor and Orbital ATK after the Spin-Off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local and foreign income taxes, other tax matters and related tax returns. We have joint and several liability with Orbital ATK to the IRS for the consolidated U.S. federal income taxes of the Orbital ATK consolidated group relating to the taxable periods in which we were part of that group. However, the Tax Matters Agreement specifies the portion, if any, of this tax liability for which we bear responsibility, and Orbital ATK agrees to indemnify us against any amounts for which the we are not responsible. The Tax Matters Agreement also provides special rules for allocating tax liabilities in the event that the Spin-Off is determined not to be tax-free. The Tax Matters Agreement provides for certain covenants that may restrict the ability to pursue strategic or other transactions that otherwise could maximize the value of the business and may discourage or delay a change of control. For example, unless we (or Orbital ATK, as applicable) were to receive a supplemental private letter ruling from the IRS or an unqualified opinion from a nationally recognized tax advisor, or Orbital ATK were to grant us a waiver, we would be restricted until two years after the Spin-Off is consummated from entering into transactions which would result in an ownership shift in the Company of more than 30% (measured by vote or value) or divestitures of certain businesses or entities which could impact the tax-free nature of the Spin-Off. Though valid as between the parties, the Tax Matters Agreement is not binding on the IRS.
Prior to the Spin-Off, Orbital ATK or one of its subsidiaries filed income tax returns in the U.S. federal and various U.S. state jurisdictions that included Vista Outdoor. In addition, certain of our subsidiaries file income tax returns in foreign jurisdictions. After the Spin-Off we file income tax returns in the U.S. federal, foreign and various U.S. state jurisdictions. With a few exceptions, Orbital ATK and its subsidiaries and Vista Outdoor are no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities prior to 2009. The IRS has completed the audits of Orbital ATK through fiscal year 2012 and is currently auditing Orbital ATK's tax returns for fiscal years 2013 and 2014. The IRS is also currently auditing the our tax return that begins after the Spin-Off and ends on March 31, 2015. We believe appropriate provisions for all outstanding issues relating to our portion of these returns have been made for all remaining open years in all jurisdictions.
As of March 31, 2016 and 2015, the total amount of unrecognized tax benefits was $36,194 and $30,768, respectively, of which $29,884 and $25,875, respectively, would affect the effective tax rate, if recognized. The remaining balance is related to deferred tax items which only impact the timing of tax payments. Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $5,388 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $4,574. See Note 11 to the consolidated and combined financial statements for further details.
We believe it is more likely than not that the recorded deferred benefits will be realized through the reduction of future taxable income. Our recorded valuation allowance of $3,234 at March 31, 2016 relates to certain tax credits, net operating losses and interest carryforwards that are not expected to be realized before their expiration. The valuation allowance decreased during fiscal year 2016 primarily due to the expiration of certain capital losses and credits and the use of certain credits.
Fiscal 2015
Sales
The following is a summary of each operating segment's sales:
|
| | | | | | | | | | | | | | |
| Years Ended March 31 | | | | |
| 2015 | | 2014 | | $ Change | | % Change |
Shooting Sports | $ | 1,353,092 |
| | $ | 1,422,442 |
| | $ | (69,350 | ) | | (4.9 | )% |
Outdoor Products | 730,322 |
| | 451,477 |
| | 278,845 |
| | 61.8 | % |
Total sales | $ | 2,083,414 |
| | $ | 1,873,919 |
| | $ | 209,495 |
| | 11.2 | % |
The overall fluctuation in net sales was driven by the changes within the operating segments as described below.
Shooting Sports. The decrease in sales was primarily caused by reduced volume of .223/5.56 ammunition (which is primarily sourced from Orbital ATK), primers and firearms as a result of softening market demand, partially offset by an increase in pistol and rimfire ammunition due to additional capacity and by an increase of $15,100 as result of the Savage Arms acquisition during fiscal year 2014.
Outdoor Products. The increase in sales was primarily driven by an increase of $335,700 as result of the acquisition of Bushnell during fiscal year 2014, partially offset by softening in the tactical accessories and reloading business.
Cost of Goods Sold and Gross Profit
The following is a summary of each operating segment's cost of goods sold and gross profit:
|
| | | | | | | | | | | | | | |
| Years Ended March 31 | | | | |
Cost of Goods Sold | 2015 | | 2014 | | $ Change | | % Change |
Shooting Sports | $ | 1,021,947 |
| | $ | 1,039,471 |
| | $ | (17,524 | ) | | (1.7 | )% |
Outdoor Products | 530,279 |
| | 369,444 |
| | 160,835 |
| | 43.5 | % |
Corporate | 2,267 |
| | (2,299 | ) | | 4,566 |
| | (198.6 | )% |
Total cost of sales | $ | 1,554,493 |
| | $ | 1,406,616 |
| | $ | 147,877 |
| | 10.5 | % |
|
| | | | | | | | | | | | | | |
| Years Ended March 31, | | | | |
Gross Profit | 2015 | | 2014 | | $ Change | | % Change |
Shooting Sports | $ | 331,145 |
| | $ | 382,971 |
| | $ | (51,826 | ) | | (13.5 | )% |
Outdoor Products | 200,043 |
| | 83,787 |
| | 116,256 |
| | 138.8 | % |
Corporate | (2,267 | ) | | 545 |
| | (2,812 | ) | | (516.0 | )% |
Total | $ | 528,921 |
| | $ | 467,303 |
| | $ | 61,618 |
| | 13.2 | % |
The overall fluctuation in cost of sales and gross profit was driven by the changes within the operating segments as described below.
Shooting Sports. The decrease in gross profit was primarily caused by reduced sales volumes, product mix and targeted promotional activity in response to market conditions, partially offset by a $5,700 increase due to the Savage Arms acquisition in fiscal year 2014.
Outdoor Products. The increase in gross profit was primarily driven by a $98,000 increase attributable to the acquisition of Bushnell during fiscal year 2014 and the absence of facility rationalization costs from the prior-year period.
Corporate. The decrease in corporate gross profit was caused by increased foreign currency losses.
Operating Expenses
|
| | | | | | | | | | | | | | | | | |
| Years Ended March 31 | | |
| 2015 | | As a % of Sales | | 2014 | | As a % of Sales | | Change |
Research and development | $ | 9,518 |
| | 0.5 | % | | $ | 13,984 |
| | 0.7 | % | | $ | (4,466 | ) |
Selling, general and administrative | 283,029 |
| | 13.6 | % | | 219,512 |
| | 11.7 | % | | 63,517 |
|
Goodwill and tradename impairment | 52,220 |
| | 2.5 | % | | — |
| | — | % | | 52,220 |
|
Total | $ | 344,767 |
| | 16.6 | % | | $ | 233,496 |
| | 12.4 | % | | $ | 111,271 |
|
Operating expenses increased by $111,271 year-over-year, largely driven by a $52,220 pre-tax non-cash impairment charge ($41,020 impairment to goodwill and $11,200 impairment to tradename) recorded in the fiscal year ended March 31, 2015. Research and development costs decreased due to decreased expenditures in the accessories markets. Selling, general and administrative expenses increased primarily due to increased commissions and other selling costs within the Bushnell and Savage businesses and transaction costs related to the Spin-Off, partially offset by the absence of transaction costs associated with the Bushnell acquisition in the prior year.
Net Interest Expense
|
| | | | | | | | | | | | | | |
| Years Ended March 31 | | | | |
| 2015 | | 2014 | | $ Change | | % Change |
Interest expense | $ | 30,108 |
| | $ | 15,469 |
| | $ | 14,639 |
| | 94.6 | % |
The increase in interest expense was due to the allocation of debt and interest expense to Vista Outdoor from Orbital ATK due to the acquisition of Bushnell and Savage Arms.
Income Tax Provision
|
| | | | | | | | | | | | | | | | | |
| Years Ended March 31 | | |
| 2015 | | Effective Rate | | 2014 | | Effective Rate | | Change |
Income tax provision | $ | 74,518 |
| | 48.4 | % | | $ | 85,081 |
| | 39.0 | % | | $ | (10,563 | ) |
The increase in the current period tax rate is primarily due to nondeductible goodwill impairment and increased nondeductible transaction costs, partially offset by true-up of prior year taxes.
Our provision for income taxes includes federal, state and foreign income taxes. The effective tax rate for fiscal year 2015 of 48.4% differs from the federal statutory rate of 35.0% due to the nondeductible goodwill impairment, state income taxes and nondeductible transaction costs, partially offset by DMD and true-up of prior year taxes, which decreased the rate.
The effective tax rate for fiscal year 2014 of 39.0% differs from the federal statutory rate of 35.0% due to state income taxes, unfavorable foreign earnings mix and nondeductible acquisition costs, partially offset by DMD, which decreased the rate.
We entered into a Tax Matters Agreement with Orbital ATK that governs the respective rights, responsibilities and obligations of Vista Outdoor and Orbital ATK after the Spin-Off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local and foreign income taxes, other tax matters and related tax returns. We have joint and several liability with Orbital ATK to the IRS for the consolidated U.S. federal income taxes of the Orbital ATK consolidated group relating to the taxable periods in which we were part of that group. However, the Tax Matters Agreement specifies the portion, if any, of this tax liability for which we bear responsibility, and Orbital ATK agrees to indemnify us against any amounts for which the we are not responsible. The Tax Matters Agreement also provides special rules for allocating tax liabilities in the event that the Spin-Off is determined not to be tax-free. The Tax Matters Agreement provides for certain covenants that may restrict the ability to pursue strategic or other transactions that otherwise could maximize the value of the business and may discourage or delay a change of control. For example, unless we (or Orbital ATK, as applicable) were to receive a supplemental private letter ruling from the IRS or an unqualified opinion from a nationally recognized tax advisor, or Orbital ATK were to grant us a waiver, we would be restricted until two years after the Spin-Off is consummated from entering into transactions which would result in an ownership shift in the Company of more than 30%
(measured by vote or value) or divestitures of certain businesses or entities which could impact the tax-free nature of the Spin-Off. Though valid as between the parties, the Tax Matters Agreement is not binding on the IRS.
Prior to the Spin-Off, Orbital ATK or one of its subsidiaries filed income tax returns in the U.S. federal and various U.S. state jurisdictions which included Vista Outdoor. In addition, certain of our subsidiaries file income tax returns in foreign jurisdictions. After the Spin-Off we will be filing income tax returns in the U.S. federal, foreign and various U.S. state jurisdictions. With a few exceptions, Orbital ATK and its subsidiaries and Vista Outdoor are no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities prior to 2008. The IRS has completed the audits of Orbital ATK through fiscal year 2012 and is currently auditing Orbital ATK's tax returns for fiscal years 2013 and 2014. We believe appropriate provisions for all outstanding issues relating to our portion of these returns have been made for all remaining open years in all jurisdictions.
As of March 31, 2015 and 2014, the total amount of unrecognized tax benefits was $30,768 and $25,693, respectively, of which $25,875 and $21,650, respectively, would affect the effective tax rate, if recognized. The remaining balance is related to deferred tax items which only impact the timing of tax payments. Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $1,908 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $1,561. See Note 12 to the consolidated and combined financial statements for further details.
We believed it is more likely than not that the recorded deferred benefits would be realized through the reduction of future taxable income. Our recorded valuation allowance of $4,650 at March 31, 2015 relates to certain capital loss, tax credits and net operating losses that are not expected to be realized before their expiration. The valuation allowance decreased during fiscal year 2015 primarily due to the expiration of certain capital losses and credits and the use of certain credits.
Liquidity and Capital Resources
We manage our business to maximize operating cash flows as the primary source of liquidity. In addition to cash on hand and cash generated by operations, sources of liquidity include a committed credit facility and access to the public debt and equity markets. We use our cash to fund investments in our existing core businesses and for debt repayment, share repurchases, and acquisitions or other activities.
Cash Flow Summary
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated and Combined Statement of Cash Flows for the years ended March 31, 2016, 2015, and 2014 are summarized as follows:
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Cash flows provided by operating activities | $ | 198,002 |
| | $ | 154,338 |
| | $ | 172,310 |
|
Cash flows used for investing activities | (503,204 | ) | | (42,869 | ) | | (1,341,747 | ) |
Cash flows provided by financing activities | 192,600 |
| | 116,126 |
| | 1,209,316 |
|
Effect of foreign currency exchange rate fluctuations on cash | 343 |
| | (3,648 | ) | | 58 |
|
Net cash flows | $ | (112,259 | ) | | $ | 223,947 |
| | $ | 39,937 |
|
Operating Activities.
Net cash provided by operating activities was $198,002 in fiscal year 2016 compared to $154,338 in fiscal year 2015. This increase of $43,664 was driven by an increase in net income primarily due to the absence of a $52,220 pre-tax non-cash impairment charge ($41,020 impairment to goodwill and $11,200 impairment to tradename) recorded in the fiscal year ended March 31, 2015, improvement in our ability to collect receivables and payment of payables, partially offset by investments in inventory to support sales activities.
Net cash provided by operating activities was $154,338 in fiscal 2015 compared to $172,310 in fiscal year 2014. This decrease of $17,972 was driven by the timing of the collection of receivables and increases in balances settled with Orbital ATK.
Investing Activities.
Net cash used for investing activities was $503,204 in fiscal 2016 compared to $42,869 in fiscal year 2015. This increase of $460,335 was primarily caused by the impact of the acquisitions of CamelBak and Jimmy Styks.
Net cash used for investing activities was $42,869 in fiscal 2015 compared to $1,341,747 in fiscal year 2014. The decrease of $1,298,878 was primarily caused by the impact of the acquisitions of Bushnell and Savage Arms in the prior year.
Financing Activities.
Net cash provided by financing activities was $192,600 in fiscal year 2016 compared to $116,126 in fiscal year 2015. This change of $76,474 reflects the absence of the dividend to Orbital ATK of $214,000, partially offset by an increase in share repurchases in the current year of $138,097.
Net cash provided by financing activities was $116,126 in fiscal year 2015 compared to $1,209,316 in fiscal year 2014. This change of $1,093,190 reflects the issuance of $350,000 in debt and the dividend to Orbital ATK of $214,000 as well as changes in Orbital ATK’s investment in Vista Outdoor and the allocation of debt to Vista Outdoor from Orbital ATK. Subsequent to the Spin-Off, we no longer participate in cash management and funding arrangements with Orbital ATK. Prior to the Spin-Off, we utilized those arrangements to fund significant expenditures, such as manufacturing capacity expansion and acquisitions.
Liquidity
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 and expand production facilities and working capital requirements. Our debt service requirements over the next two years consist of principal and interest payments due under the 2016 Credit Agreement, as well as interest payments on the 5.875% Notes, as discussed further below.
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, through our 2016 Credit Agreement, access to debt and equity markets, as well as potential future sources of funding including additional bank financing, will be adequate to fund future growth as well as to service our currently anticipated long-term debt and pension obligations and make capital expenditures over the next 12 months. Capital expenditures for fiscal year 2017 are expected to be approximately $90,000.
We do not expect that our access to liquidity sources will be materially impacted in the near future. There can be no assurance, however, that the cost or availability of future borrowings, if any, will not be materially impacted by capital market conditions.
Long-Term Debt and Credit Agreement
As of March 31, 2016, we had actual total indebtedness of $682,500, which consisted of the following:
|
| | | | | | | |
| March 31, 2016 | | March 31, 2015 |
Credit Agreement dated December 19, 2014: | | | |
Term Loan due 2020 | $ | 332,500 |
| | $ | 350,000 |
|
Revolving Credit Facility due 2020 | — |
| | — |
|
Total principal amount of Credit Agreement | 332,500 |
| | 350,000 |
|
5.875% Senior Notes due 2023 | 350,000 |
| | — |
|
Principal amount of long-term debt | 682,500 |
| | 350,000 |
|
Less: unamortized deferred financing costs | 12,213 |
| | 10,335 |
|
Carrying amount of long-term debt | 670,287 |
| | 339,665 |
|
Less: current portion | 17,500 |
| | 17,500 |
|
Carrying amount of long-term debt, excluding current portion | $ | 652,787 |
| | $ | 322,165 |
|
Our total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders' equity) was 29% as of March 31, 2016.
See Note 9 "Long-Term Debt" to the consolidated and combined financial statements in Part II, Item 8 for a detailed discussion of these borrowings.
Covenants
Credit Agreement
Our 2014 Credit Agreement as of March 31, 2016 imposed restrictions on us, including limitations on our ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. In addition, the 2014 Credit Agreement limited our ability to enter into sale-and-leaseback transactions. The 2014 Credit Agreement allowed us to make unlimited "restricted payments" (as defined in the 2014 Credit Agreement), which, among other items, allowed payments for future share repurchases and dividends, as long as we maintained a certain amount of liquidity and maintained certain debt limits. When those requirements were not met, the limit under the 2014 Credit Agreement was equal to $150,000 plus proceeds of any equity issuances plus 50% of net income since February 9, 2015.
The 2014 Credit Agreement contained financial covenants that required us to maintain a consolidated interest coverage ratio (as defined in the 2014 Credit Agreement) of not less than 3.00 to 1.00 and to maintain a consolidated leverage ratio (as defined in the 2014 Credit Agreement) of 3.50 to 1.00 or less. Our financial covenant ratios as of March 31, 2016 were as follows:
|
| | | | | |
| Leverage Ratio* | | Interest Coverage Ratio† |
Requirement | 3.50 |
| | 3.00 |
|
Actual | 1.72 |
| | 12.34 |
|
* Not to exceed the required financial ratio | | | |
† Not to be below the required financial ratio | | | |
The Leverage Ratio was the sum of our total debt plus financial letters of credit and surety bonds, net of up to $75,000 of cash, divided by Covenant EBITDA (which included adjustments for items such as non-recurring or extraordinary non-cash items, non-cash charges related to stock-based compensation, and intangible asset impairment charges, as well as inclusion of EBITDA of acquired companies on a pro forma basis) for the past four fiscal quarters. The Interest Coverage Ratio was Covenant EBITDA divided by interest expense (excluding non-cash charges).
On April 1, 2016, we entered into the 2016 Credit Agreement, which replaced the 2014 Credit Agreement. The covenants under the 2016 Credit Agreement are substantially consistent with those in the 2014 Credit Agreement.
Our ability to comply with these covenants and to meet and maintain the financial ratios may be affected by events beyond our control. Borrowings under the 2016 Credit Agreement are subject to compliance with these covenants. As of March 31, 2016, we were in compliance with the covenants in the 2014 Credit Agreement and expect to be in compliance with the covenants in the 2016 Credit Agreement for the foreseeable future.
A failure to comply with the covenants in the 2016 Credit Agreement could prevent us from drawing under the revolving credit facility and could result in an event of default under the 2016 Credit Agreement, which could allow the creditors to accelerate the related indebtedness and proceed against the collateral that secures the indebtedness. We may not have sufficient liquidity to repay the indebtedness in such circumstances.
5.875% Notes
The indenture governing the 5.875% Notes contains covenants that, among other things, limit our ability to incur or permit to exist certain liens, sell, transfer or otherwise dispose of assets, consolidate, amalgamate, merge or sell all or substantially all of our assets, enter into transactions with affiliates, enter into agreements restricting our subsidiaries’ ability to pay dividends, incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem our capital stock, prepay, redeem or repurchase certain debt and make loans and investments. A failure to comply with the covenants in the indenture could result in an event of default, which could allow the holders of the 5.875% Notes to accelerate the 5.875% Notes. We may not have sufficient liquidity to repay the 5.875% Notes in such circumstances.
The 2016 Credit Agreement and the indenture governing the 5.875% Notes contain cross-default provisions so that non-compliance with the covenants within one debt agreement could cause a default under other debt agreements as well. As of March 31, 2016, we were in compliance with the covenants and expect to be in compliance for the foreseeable future.
However, our business, financial position and results of operations are subject to various risks and uncertainties, including some that may be beyond our control, and we cannot provide any assurance that we will be able to comply with all such financial covenants in the future. For example, during periods in which we experience declines in sales or otherwise experience the adverse impact of seasonality, we may not be able to comply with such financial covenants.
Share Repurchases
On February 25, 2015, our Board of Directors authorized a new share repurchase program of up to $200,000 worth of shares of our common stock, executable over the following two years. The shares may be purchased from time to time in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. The new repurchase authorization also allows us to make repurchases under Rule 10b5-1 of the Securities Exchange Act of 1934. During fiscal 2016, we repurchased 3,179,086 shares for $142,200, and in fiscal 2015, we repurchased 162,000 shares for $6,870.
Any additional repurchases would be subject to market conditions and our compliance with our debt covenants, as described above.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of March 31, 2016:
|
| | | | | | | | | | | | | | | | | | | |
| | | Payments due by period |
| Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
Contractual obligations: | | | | | | | | | |
Long-term debt | $ | 682,500 |
| | $ | 17,500 |
| | $ | 35,000 |
| | $ | 280,000 |
| | $ | 350,000 |
|
Interest on debt(1) | 197,296 |
| | 31,699 |
| | 56,531 |
| | 47,378 |
| | 61,688 |
|
Operating leases | 44,467 |
| | 14,767 |
| | 18,155 |
| | 8,882 |
| | 2,663 |
|
Pension and other PRB plan payouts | 142,408 |
| | 11,450 |
| | 25,446 |
| | 28,789 |
| | 76,723 |
|
Total contractual obligations | $ | 1,066,671 |
| | $ | 75,416 |
| | $ | 135,132 |
| | $ | 365,049 |
| | $ | 491,074 |
|
|
| | | | | | | | | | | | | | | |
| | | Commitment Expiration by period |
| Total | | Within 1 year | | 1 - 3 years | | 3 - 5 years |
Other commercial commitments: | | | | | | | |
Letters of credit | $ | 30,222 |
| | $ | 20,171 |
| | $ | 10,051 |
| | $ | — |
|
________________________________
| |
(1) | Includes interest on variable rate debt calculated based on interest rates at March 31, 2016. |
The total liability for uncertain tax positions at March 31, 2016 was approximately $36,194 (see Note 11 to the consolidated and combined financial statements in Item 8 of this report), $3,522 of which could be paid within 12 months and is therefore is classified within current taxes payable. We are not able to provide a reasonably reliable estimate of the timing of future payments relating to the non-current uncertain tax position obligations.
Pension plan payouts are an estimate of the benefit payouts through fiscal year 2026 to provide pension benefits for employees based on expected actuarial estimated service accruals through fiscal year 2026.
Contingencies
Litigation. 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.
Environmental Liabilities. 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 investigation and/or remediation activities at certain sites that we own or operate or formerly owned or operated.
We also have been identified as a PRP, along with other parties, in regulatory agency actions associated with hazardous waste sites. As a PRP, we may be required to pay a share of the costs of the investigation and clean-up of these sites. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our operating results, financial condition, or cash flows.
New Accounting Pronouncements
See Note 1 to the consolidated and combined financial statements in Item 8 of this report for discussion of new accounting pronouncements.
Inflation
In management's opinion, inflation has not had a significant impact upon the results of Vista Outdoor's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. To mitigate the risks from interest rate exposure, we may enter into hedging transactions, mainly interest rate swaps, through derivative financial instruments that have been authorized pursuant to corporate policies. We may use derivatives to hedge certain interest rate, foreign currency exchange rate, and commodity price risks, but do not use derivative financial instruments for trading or other speculative purposes, and we are not a party to leveraged financial instruments. Additional information regarding the financial instruments is contained in Notes 1 and 3 to the consolidated and combined financial statements. Our objective in managing exposure to changes in interest rates is to limit the impact of such changes on earnings and cash flow and to lower the overall borrowing costs.
We measure market risk related to holdings of financial instruments based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in fair values, cash flows, and earnings based on a hypothetical change (increase and decrease) in interest rates. We used current market rates on the debt portfolio to perform the sensitivity analysis. Certain items such as lease contracts, insurance contracts, and obligations for pension and other postretirement benefits were not included in the analysis.
We conduct business through our subsidiaries in many different countries, and fluctuations in currency exchange rates could have a significant impact on the reported results of operations, which are presented in U.S. dollars. Cross-border transactions, both with external parties and intercompany relationships, result in increased exposure to foreign exchange effects. Accordingly, significant changes in currency exchange rates, particularly the Euro, the British Pound, the Chinese Renminbi (Yuan), the Canadian Dollar, and the Australian dollar, could cause fluctuations in the reported results of our businesses’ operations that could negatively affect our results of operations.
In addition, sales and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vista Outdoor Inc.
Farmington, Utah
We have audited the accompanying consolidated balance sheets of Vista Outdoor Inc. and subsidiaries (the "Company") as of March 31, 2016 and 2015, and the related consolidated and combined statements of comprehensive income, stockholders’ and parent company equity, and cash flows for each of the three years in the period ended March 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of Vista Outdoor Inc. at March 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
As described in Notes 1 and 15, prior to February 9, 2015 the accompanying combined financial statements were derived from the consolidated financial statements and accounting records of Alliant Techsystems Inc. The accompanying combined financial statements also include expense allocations for certain corporate functions historically provided by Alliant Techsystems Inc. and do not necessarily reflect the financial position, results of operations, and cash flows that would have existed if the Company had been a separate, stand-alone entity during the periods prior to February 9, 2015.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of March 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 27, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE, LLP
Minneapolis, Minnesota
May 27, 2016
VISTA OUTDOOR INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | |
| | Years Ended March 31 |
(Amounts in thousands except per share data) | | 2016 | | 2015 | | 2014 |
Sales, net | | $ | 2,270,734 |
| | $ | 2,083,414 |
| | $ | 1,873,919 |
|
Cost of sales | | 1,651,289 |
| | 1,554,493 |
| | 1,406,616 |
|
Gross profit | | 619,445 |
| | 528,921 |
| | 467,303 |
|
Operating expenses: | | | | | | |
Research and development | | 12,512 |
| | 9,518 |
| | 13,984 |
|
Selling, general, and administrative | | 344,175 |
| | 283,029 |
| | 219,512 |
|
Goodwill and tradename impairment | | — |
| | 52,220 |
| | — |
|
Income before interest and income taxes | | 262,758 |
| | 184,154 |
| | 233,807 |
|
Interest expense, net | | (24,351 | ) | | (30,108 | ) | | (15,469 | ) |
Income before income taxes | | 238,407 |
| | 154,046 |
| | 218,338 |
|
Income tax provision | | 91,370 |
| | 74,518 |
| | 85,081 |
|
Net income | | $ | 147,037 |
| | $ | 79,528 |
| | $ | 133,257 |
|
Earnings per common share: | | | | | | |
Basic | | $ | 2.36 |
| | $ | 1.25 |
| | $ | 2.09 |
|
Diluted | | $ | 2.35 |
| | $ | 1.25 |
| | $ | 2.09 |
|
Weighted-average number of common shares outstanding: | | | | | | |
Basic | | 62,211 |
| | 63,596 |
| | 63,875 |
|
Diluted | | 62,568 |
| | 63,857 |
| | 63,875 |
|
| | | | | | |
Net income (from above) | | $ | 147,037 |
| | $ | 79,528 |
| | $ | 133,257 |
|
Other comprehensive income (loss), net of tax: | | | | | | |
Pension and other postretirement benefit liabilities: | | | | | | |
Reclassification of prior service credits for pension and postretirement benefit plans recorded to net income, net of tax benefit of $632, $83, and $0 | | (1,068 | ) | | (139 | ) | | — |
|
Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income, net of tax expense of $(3,276), $(1,334), and $0 | | 5,524 |
| | 2,246 |
| | — |
|
Valuation adjustment for pension and postretirement benefit plans, net of tax expense of $5,917, $0, and $0 | | (9,968 | ) | | — |
| | — |
|
Change in fair value of derivatives, net of tax benefit of $0, $0, and $(251), respectively | | — |
| | — |
| | 401 |
|
Change in cumulative translation adjustment, net of tax (expense) benefit of $(41), $0, and $942 | | 5,601 |
| | (50,643 | ) | | (1,505 | ) |
Total other comprehensive income (loss) | | 89 |
| | (48,536 | ) | | (1,104 | ) |
Comprehensive income | | $ | 147,126 |
| | $ | 30,992 |
| | $ | 132,153 |
|
See Notes to the Consolidated and Combined Financial Statements.
VISTA OUTDOOR INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | | |
| | March 31 |
(Amounts in thousands except share data) | | 2016 | | 2015 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 151,692 |
| | $ | 263,951 |
|
Net receivables | | 428,398 |
| | 361,694 |
|
Net inventories | | 440,240 |
| | 375,621 |
|
Other current assets | | 29,334 |
| | 13,452 |
|
Total current assets | | 1,049,664 |
| | 1,014,718 |
|
Net property, plant, and equipment | | 203,485 |
| | 190,607 |
|
Goodwill | | 1,023,451 |
| | 782,163 |
|
Net intangible assets | | 650,472 |
| | 517,482 |
|
Deferred charges and other non-current assets | | 15,562 |
| | 7,476 |
|
Total assets | | $ | 2,942,634 |
| | $ | 2,512,446 |
|
LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
Current portion of long-term debt | | $ | 17,500 |
| | $ | 17,500 |
|
Accounts payable | | 147,738 |
| | 134,432 |
|
Accrued compensation | | 47,394 |
| | 27,146 |
|
Accrued income taxes | | 12,171 |
| | 9,569 |
|
Federal excise tax | | 27,701 |
| | 23,194 |
|
Other accrued liabilities | | 116,397 |
| | 96,071 |
|
Total current liabilities | | 368,901 |
| | 307,912 |
|
Long-term debt | | 652,787 |
| | 322,165 |
|
Deferred income tax liabilities | | 135,957 |
| | 143,039 |
|
Accrued pension and postemployment liabilities | | 73,503 |
| | 59,345 |
|
Other long-term liabilities | | 51,319 |
| | 31,221 |
|
Total liabilities | | 1,282,467 |
| | 863,682 |
|
Commitments and contingencies (Notes 11, 13 and 14) | |
| |
|
Common stock—$.01 par value: | | | | |
Authorized—500,000,000 shares | | | | |
Issued and outstanding— 60,825,914 shares at March 31, 2016 and 63,873,222 shares at March 31, 2015 | | 608 |
| | 639 |
|
Additional paid-in-capital | | 1,743,371 |
| | 1,742,125 |
|
Retained earnings | | 166,421 |
| | 19,384 |
|
Accumulated other comprehensive loss | | (110,214 | ) | | (110,303 | ) |
Common stock in treasury, at cost— 3,138,525 shares held at March 31, 2016 and 85,940 shares held at March 31, 2015 | | (140,019 | ) | | (3,081 | ) |
Total stockholders' equity | | 1,660,167 |
| | 1,648,764 |
|
Total liabilities and equity | | $ | 2,942,634 |
| | $ | 2,512,446 |
|
See Notes to the Consolidated and Combined Financial Statements.
VISTA OUTDOOR INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | | |
| | Years Ended March 31 |
(Amounts in thousands) | | 2016 | | 2015 | | 2014 |
Operating Activities | | | | | | |
Net income | | $ | 147,037 |
| | $ | 79,528 |
| | $ | 133,257 |
|
Adjustments to net income to arrive at cash provided by operating activities: | | | | | | |
Depreciation | | 38,953 |
| | 35,405 |
| | 24,891 |
|
Amortization of intangible assets | | 33,661 |
| | 31,146 |
| | 20,011 |
|
Amortization of deferred financing costs | | 2,501 |
| | 2,447 |
| | 897 |
|
Goodwill and tradename impairment | | — |
| | 52,220 |
| | — |
|
Deferred income taxes | | (457 | ) | | (947 | ) | | 8,746 |
|
Loss (gain) on disposal of property | | 323 |
| | (136 | ) | | 7,668 |
|
Share-based compensation | | 12,279 |
| | 3,012 |
| | — |
|
Excess tax benefits from share-based plans | | — |
| | (120 | ) | | — |
|
Changes in assets and liabilities: | | | | | | |
Net receivables | | (33,596 | ) | | (72,321 | ) | | (357 | ) |
Net inventories | | (31,065 | ) | | 40,991 |
| | 8,970 |
|
Accounts payable | | 3,398 |
| | (37,837 | ) | | (32,277 | ) |
Accrued compensation | | 8,006 |
| | (9,047 | ) | | 1,016 |
|
Accrued income taxes | | (1,804 | ) | | 17,246 |
| | (1,182 | ) |
Federal excise tax | | 4,535 |
| | 6,935 |
| | 9,042 |
|
Pension and other postretirement benefits | | 5,076 |
| | 248 |
| | — |
|
Other assets and liabilities | | 9,155 |
| | 5,568 |
| | (8,372 | ) |
Cash provided by operating activities | | 198,002 |
| | 154,338 |
| | 172,310 |
|
Investing Activities | | | | | | |
Capital expenditures | | (41,526 | ) | | (43,189 | ) | | (40,234 | ) |
Acquisitions of businesses, net of cash acquired | | (462,050 | ) | | — |
| | (1,301,687 | ) |
Proceeds from the disposition of property, plant, and equipment | | 372 |
| | 320 |
| | 174 |
|
Cash used for investing activities | | (503,204 | ) | | (42,869 | ) | | (1,341,747 | ) |
Financing Activities | | | | | | |
Borrowings on line of credit | | 360,000 |
| | — |
| | 200,000 |
|
Repayments of line of credit | | (360,000 | ) | | — |
| | (200,000 | ) |
Proceeds from issuance of long-term debt | | 350,000 |
| | 350,000 |
| | — |
|
Payments made on bank debt | | (17,500 | ) | | — |
| | — |
|
Net transfers from parent | | — |
| | 16,181 |
| | 206,678 |
|
Payment from former parent | | 6,500 |
| | — |
| | — |
|
Dividend paid to parent | | — |
| | (214,000 | ) | | — |
|