UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended January 1, 2017 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission file number 1-36597
Vista Outdoor Inc.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 47-1016855 (I.R.S. Employer Identification No.) | |
262 N University Drive Farmington, UT | 84025 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code: (801) 447-3000
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 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.
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 February 6, 2017, there were 57,054,063 shares of the registrant's voting common stock outstanding.
TABLE OF CONTENTS
PART I— FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Quarter ended | Nine months ended | |||||||||||||||
(Amounts in thousands except per share data) | January 1, 2017 | January 3, 2016 | January 1, 2017 | January 3, 2016 | ||||||||||||
Sales, net | $ | 653,558 | $ | 592,557 | $ | 1,968,139 | $ | 1,658,431 | ||||||||
Cost of sales | 484,952 | 425,053 | 1,442,747 | 1,202,611 | ||||||||||||
Gross profit | 168,606 | 167,504 | 525,392 | 455,820 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 8,170 | 3,681 | 24,151 | 8,851 | ||||||||||||
Selling, general, and administrative | 95,893 | 88,591 | 303,060 | 252,011 | ||||||||||||
Acquisition claim settlement gain, net | — | — | (30,027 | ) | — | |||||||||||
Goodwill and intangibles impairment | 449,199 | — | 449,199 | — | ||||||||||||
Income (loss) before interest and income taxes | (384,656 | ) | 75,232 | (220,991 | ) | 194,958 | ||||||||||
Interest expense, net | (10,551 | ) | (7,776 | ) | (32,657 | ) | (16,908 | ) | ||||||||
Income (loss) before income taxes | (395,207 | ) | 67,456 | (253,648 | ) | 178,050 | ||||||||||
Income tax provision (benefit) | (17,548 | ) | 24,297 | 21,663 | 68,326 | |||||||||||
Net income (loss) | $ | (377,659 | ) | $ | 43,159 | $ | (275,311 | ) | $ | 109,724 | ||||||
Earnings (loss) per common share: | ||||||||||||||||
Basic | $ | (6.48 | ) | $ | 0.70 | $ | (4.63 | ) | $ | 1.76 | ||||||
Diluted | $ | (6.44 | ) | $ | 0.70 | $ | (4.60 | ) | $ | 1.75 | ||||||
Weighted-average number of common shares outstanding: | ||||||||||||||||
Basic | 58,275 | 61,717 | 59,478 | 62,175 | ||||||||||||
Diluted | 58,634 | 62,092 | 59,819 | 62,534 | ||||||||||||
Net income (loss) (from above) | $ | (377,659 | ) | $ | 43,159 | $ | (275,311 | ) | $ | 109,724 | ||||||
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 $162 and $158, respectively, for the quarter ended, and $486 and $474, respectively, for the nine months ended | (274 | ) | (267 | ) | (822 | ) | (801 | ) | ||||||||
Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income, net of tax expense of $(734) and $(819), respectively, for the quarter ended, and $(2,202) and $(2,457), respectively, for the nine months ended | 1,236 | 1,381 | 3,708 | 4,143 | ||||||||||||
Change in derivatives, net of tax benefit (expense) of $0 and $2, respectively, for the quarter ended, and $0 and $(49), respectively, for the nine months ended | — | (3 | ) | — | 83 | |||||||||||
Change in cumulative translation adjustment, net of tax benefit of $0 and $0, respectively, for the quarter ended, and $0 and $0, respectively, for the nine months ended | (10,711 | ) | (788 | ) | (15,255 | ) | (4,837 | ) | ||||||||
Total other comprehensive income (loss) | (9,749 | ) | 323 | (12,369 | ) | (1,412 | ) | |||||||||
Comprehensive income (loss) | $ | (387,408 | ) | $ | 43,482 | $ | (287,680 | ) | $ | 108,312 | ||||||
See Notes to the Condensed Consolidated Financial Statements.
2
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Amounts in thousands except share data) | January 1, 2017 | March 31, 2016 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 40,841 | $ | 151,692 | ||||
Net receivables | 533,334 | 428,398 | ||||||
Net inventories | 585,116 | 440,240 | ||||||
Income tax receivable | 8,904 | — | ||||||
Other current assets | 28,443 | 29,334 | ||||||
Total current assets | 1,196,638 | 1,049,664 | ||||||
Net property, plant, and equipment | 247,715 | 203,485 | ||||||
Goodwill | 855,215 | 1,023,451 | ||||||
Net intangible assets | 717,165 | 650,472 | ||||||
Deferred charges and other non-current assets | 27,432 | 15,562 | ||||||
Total assets | $ | 3,044,165 | $ | 2,942,634 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 222,000 | $ | 17,500 | ||||
Accounts payable | 102,904 | 147,738 | ||||||
Accrued compensation | 39,923 | 47,394 | ||||||
Accrued income taxes | — | 12,171 | ||||||
Federal excise tax | 31,196 | 27,701 | ||||||
Other current liabilities | 181,421 | 116,397 | ||||||
Total current liabilities | 577,444 | 368,901 | ||||||
Long-term debt | 921,601 | 652,787 | ||||||
Deferred income tax liabilities | 153,130 | 135,957 | ||||||
Accrued pension and postemployment liabilities | 69,575 | 73,503 | ||||||
Other long-term liabilities | 64,731 | 51,319 | ||||||
Total liabilities | 1,786,481 | 1,282,467 | ||||||
Commitments and contingencies (Notes 10 and 13) | ||||||||
Common stock—$.01 par value: | ||||||||
Authorized—500,000,000 shares | ||||||||
Issued and outstanding— 57,722,723 shares at January 1, 2017 and 60,825,914 shares at March 31, 2016 | 577 | 608 | ||||||
Additional paid-in capital | 1,755,742 | 1,743,371 | ||||||
(Accumulated deficit) Retained earnings | (108,890 | ) | 166,421 | |||||
Accumulated other comprehensive loss | (122,583 | ) | (110,214 | ) | ||||
Common stock in treasury, at cost— 6,241,716 shares held at January 1, 2017 and 3,138,525 shares held at March 31, 2016 | (267,162 | ) | (140,019 | ) | ||||
Total stockholders' equity | 1,257,684 | 1,660,167 | ||||||
Total liabilities and stockholders' equity | $ | 3,044,165 | $ | 2,942,634 | ||||
See Notes to the Condensed Consolidated Financial Statements.
3
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended | ||||||||
(Amounts in thousands) | January 1, 2017 | January 3, 2016 | ||||||
Operating Activities: | ||||||||
Net income (loss) | $ | (275,311 | ) | $ | 109,724 | |||
Adjustments to net income(loss) to arrive at cash provided by operating activities: | ||||||||
Depreciation | 40,805 | 28,134 | ||||||
Amortization of intangible assets | 31,020 | 24,602 | ||||||
Goodwill and intangibles impairment | 449,199 | — | ||||||
Amortization of deferred financing costs | 3,474 | 1,831 | ||||||
Deferred income taxes | (30,171 | ) | 697 | |||||
Loss (gain) on disposal of property, plant, and equipment | 140 | (180 | ) | |||||
Stock-based compensation | 9,603 | 9,055 | ||||||
Excess tax benefits from share-based plans | — | (206 | ) | |||||
Changes in assets and liabilities, net of acquisition of businesses: | ||||||||
Net receivables | (19,226 | ) | (36,387 | ) | ||||
Net inventories | (85,162 | ) | (75,437 | ) | ||||
Accounts payable | (79,414 | ) | (32,909 | ) | ||||
Accrued compensation | (18,871 | ) | 5,328 | |||||
Accrued income taxes | (15,863 | ) | (4,543 | ) | ||||
Federal excise tax | 3,566 | 5,688 | ||||||
Pension and other postretirement benefits | 635 | 3,458 | ||||||
Other assets and liabilities | 43,467 | 32,433 | ||||||
Cash provided by operating activities | 57,891 | 71,288 | ||||||
Investing Activities: | ||||||||
Capital expenditures | (49,302 | ) | (26,301 | ) | ||||
Acquisition of businesses, net of cash acquired | (458,149 | ) | (462,116 | ) | ||||
Proceeds from the disposition of property, plant, and equipment | 92 | 696 | ||||||
Cash used for investing activities | (507,359 | ) | (487,721 | ) | ||||
Financing Activities: | ||||||||
Borrowings on line of credit | 445,000 | 360,000 | ||||||
Payments on line of credit | (255,000 | ) | (360,000 | ) | ||||
Proceeds from issuance of long-term debt | 307,500 | 350,000 | ||||||
Payment from former parent | — | 6,500 | ||||||
Payments made on long-term debt | (24,000 | ) | (13,125 | ) | ||||
Payments made for debt issuance costs | (3,660 | ) | (4,379 | ) | ||||
Purchase of treasury shares | (122,860 | ) | (115,194 | ) | ||||
Deferred payments for acquisitions | (7,136 | ) | — | |||||
Excess tax benefits from share-based plans | — | 206 | ||||||
Proceeds from employee stock compensation plans | 75 | 438 | ||||||
Cash provided by financing activities | 339,919 | 224,446 | ||||||
Effect of foreign exchange rate fluctuations on cash | (1,302 | ) | (830 | ) | ||||
Decrease in cash and cash equivalents | (110,851 | ) | (192,817 | ) | ||||
Cash and cash equivalents at beginning of period | 151,692 | 263,951 | ||||||
Cash and cash equivalents at end of period | $ | 40,841 | $ | 71,134 | ||||
Supplemental Cash Flow Disclosures: | ||||||||
Non-cash investing activity: | ||||||||
Capital expenditures included in accounts payable | $ | 2,760 | $ | 921 | ||||
Non-cash financing activity: | ||||||||
Treasury shares purchased included in other accrued liabilities | $ | 4,479 | $ | 1,934 | ||||
See Notes to the Condensed Consolidated Financial Statements.
4
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
Common Stock $.01 Par Value | |||||||||||||||||||||||||||
(Amounts in thousands except share data) | Shares | Amount | Additional Paid-In Capital | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Equity | ||||||||||||||||||||
Balance, March 31, 2015 | 63,878,499 | $ | 639 | $ | 1,742,125 | $ | 19,384 | $ | (110,303 | ) | $ | (3,081 | ) | $ | 1,648,764 | ||||||||||||
Comprehensive income | — | — | — | 109,724 | (1,412 | ) | — | 108,312 | |||||||||||||||||||
Exercise of stock options | 20,078 | — | (426 | ) | — | — | 864 | 438 | |||||||||||||||||||
Restricted stock grants net of forfeitures | 68,272 | — | (3,046 | ) | — | — | 3,265 | 219 | |||||||||||||||||||
Share-based compensation | — | — | 9,055 | — | — | — | 9,055 | ||||||||||||||||||||
Restricted stock vested and shares withheld | (21,955 | ) | — | 955 | — | — | (1,157 | ) | (202 | ) | |||||||||||||||||
Treasury stock purchased | (2,607,436 | ) | — | — | — | — | (115,355 | ) | (115,355 | ) | |||||||||||||||||
Contribution from former parent and other | 647 | (26 | ) | (6,479 | ) | — | — | 28 | (6,477 | ) | |||||||||||||||||
Balance, January 3, 2016 | 61,338,105 | $ | 613 | $ | 1,742,184 | $ | 129,108 | $ | (111,715 | ) | $ | (115,436 | ) | $ | 1,644,754 | ||||||||||||
Balance, March 31, 2016 | 60,825,914 | $ | 608 | $ | 1,743,371 | $ | 166,421 | $ | (110,214 | ) | $ | (140,019 | ) | $ | 1,660,167 | ||||||||||||
Comprehensive income (loss) | — | — | — | (275,311 | ) | (12,369 | ) | — | (287,680 | ) | |||||||||||||||||
Exercise of stock options | 4,892 | — | (147 | ) | — | — | 222 | 75 | |||||||||||||||||||
Restricted stock grants net of forfeitures | (22,289 | ) | — | (66 | ) | — | — | (365 | ) | (431 | ) | ||||||||||||||||
Share-based compensation | — | — | 9,603 | — | — | — | 9,603 | ||||||||||||||||||||
Restricted stock vested and shares withheld | 4,881 | — | (318 | ) | — | — | (440 | ) | (758 | ) | |||||||||||||||||
Treasury stock purchased | (3,095,952 | ) | — | — | — | — | (126,560 | ) | (126,560 | ) | |||||||||||||||||
Contribution from former parent and other | 5,277 | (31 | ) | 3,299 | — | — | — | 3,268 | |||||||||||||||||||
Balance, January 1, 2017 | 57,722,723 | $ | 577 | $ | 1,755,742 | $ | (108,890 | ) | $ | (122,583 | ) | $ | (267,162 | ) | $ | 1,257,684 | |||||||||||
See Notes to the Condensed Consolidated Financial Statements.
5
VISTA OUTDOOR INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Quarter and nine months ended January 1, 2017
(Amounts in thousands except share and per share data unless otherwise indicated)
1. Basis of Presentation and Responsibility for Interim Financial Statements
Nature of Operations. Vista Outdoor Inc. (together with our subsidiaries, "we", "our", and "us") is a leading global designer, manufacturer, and marketer of consumer products in the growing outdoor sports and recreation markets. We operate in two segments, Outdoor Products and Shooting Sports. Vista Outdoor is headquartered in Farmington, Utah and has manufacturing operations and facilities in 13 U.S. States, Canada, Mexico, and Puerto Rico along with international customer service, sales, and sourcing operations in Asia, Australia, Canada, Europe, and New Zealand. Vista Outdoor was incorporated in Delaware in 2014.
This Quarterly Report on Form 10-Q should be read in conjunction with our consolidated and combined financial statements and notes included in our fiscal 2016 financial statements as filed on Form 8-K on August 11, 2016.
Basis of Presentation. Our unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of the Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain disclosures and other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. Our accounting policies are described in the notes to the consolidated and combined financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016 (“fiscal 2016”). Management is responsible for the condensed consolidated financial statements included in this document, which are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of our financial position as of January 1, 2017 and March 31, 2016, our results of operations for the quarters and nine month periods ended January 1, 2017 and January 3, 2016 and our cash flows for the nine months ended January 1, 2017 and January 3, 2016.
New Accounting Pronouncements. On February 25, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-02, Leases. The new guidance was issued to increase transparency and comparability among companies by requiring most leases be included on the balance sheet and by expanding disclosure requirements. Based on the current effective dates, the new guidance would first apply in the first quarter of our fiscal 2020. We are in the process of evaluating the effect of adoption on our financial statements.
On March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures and classification in the statement of cash flows. The standard allows for early adoption. As of March 31, 2016, we elected to early adopt this standard and prospectively present the change to the financial statements given the immaterial nature of the prior period balances.
Besides those noted above and in our fiscal 2016 financial statements, there are no other new accounting pronouncements that are expected to have a significant impact on our condensed consolidated financial statements.
2. Fair Value of Financial Instruments
The current authoritative guidance on fair value clarifies the definition of fair value, prescribes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about the use of fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The valuation techniques required by the current authoritative literature are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1—Quoted prices for identical instruments in active markets.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3—Significant inputs to the valuation model are unobservable.
6
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
2. Fair Value of Financial Instruments (Continued)
The following section describes the valuation methodologies we used to measure our financial instruments at fair value.
Long-term debt—The fair value of the variable-rate long-term debt is calculated based on current market rates for debt of the same risk and maturities. The fair value of the fixed-rate long-term debt is based on market quotes for the outstanding notes. We consider these to be Level 2 instruments.
Contingent Consideration—The acquisition-related contingent consideration liability represents the estimated fair value of additional future earn-outs payable for acquisitions of businesses that included earn-out clauses. The valuation of the contingent consideration will be evaluated on an ongoing basis and is based on management estimates and entity-specific assumptions which are considered Level 3 inputs. See Note 4 for further details.
The following table presents our financial assets and liabilities that are not measured at fair value on a recurring basis. The carrying values and estimated fair values were as follows:
January 1, 2017 | March 31, 2016 | |||||||||||||||
Carrying amount | Fair value | Carrying amount | Fair value | |||||||||||||
Fixed-rate debt | $ | 350,000 | $ | 367,063 | $ | 350,000 | $ | 366,625 | ||||||||
Variable-rate debt | 806,000 | 806,000 | 332,500 | 332,500 | ||||||||||||
3. Earnings (Loss) Per Share
The computation of earnings (loss) per share ("EPS") includes Basic EPS computed based upon the weighted average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted average number of common shares and common equivalent shares. Common equivalent shares represent the effect of stock-based awards during each period presented, which, if exercised or earned, would have a dilutive effect on EPS.
In computing EPS for the quarters and nine month periods ended January 1, 2017 and January 3, 2016, earnings (loss), as reported for each respective period, is divided by:
Quarter ended | Nine months ended | |||||||||||
(in thousands) | January 1, 2017 | January 3, 2016 | January 1, 2017 | January 3, 2016 | ||||||||
Basic EPS shares outstanding | 58,275 | 61,717 | 59,478 | 62,175 | ||||||||
Dilutive effect of stock-based awards | 359 | 375 | 341 | 359 | ||||||||
Diluted EPS shares outstanding | 58,634 | 62,092 | 59,819 | 62,534 | ||||||||
Shares excluded from the calculation of diluted EPS because the option exercise/threshold price was greater than the average market price of the common shares | 139 | 68 | 139 | 68 | ||||||||
Share Repurchases
On February 25, 2015, our Board of Directors authorized a share repurchase program of up to $200,000 worth of shares of our common stock, executable over two years. We completed this program during the nine months ended January 1, 2017. On August 25, 2016, our Board of Directors authorized a new share repurchase program of up to $100,000 worth of our common stock, executable through March 31, 2018. 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 repurchase authorization also allows us to make repurchases under Rule 10b5-1 of the Securities Exchange Act of 1934. During the quarters ended January 1, 2017 and January 3, 2016, we repurchased 1,559,938 shares for $59,993 and 1,405,729 shares for $61,338, respectively. During the nine months ended January 1, 2017 and January 3, 2016, we repurchased 3,095,952 shares for $126,560 and 2,607,436 shares for $115,355, respectively. Since the inception of the programs through January 1, 2017, we have repurchased 6,437,038 shares for $275,630.
Any additional repurchases would be subject to market conditions and our compliance with our debt covenants.
7
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
4. Acquisitions
Acquisition of Camp Chef
On September 1, 2016, we completed the acquisition of privately owned Logan Outdoor Products, LLC and Peak Trades, LLC ("Camp Chef"), a leading provider of outdoor cooking solutions. Under the terms of the transaction, we paid $60,000, subject to customary working capital adjustments, utilizing cash on hand and borrowings under our existing credit facility. An additional $4,000 has been deferred and will be paid in equal installments on the first, second and third anniversary of the closing date, and $10,000 will be payable if incremental profitability growth milestones are met and key members of Camp Chef management continue their employment with us. The $10,000 will be expensed over the three-year measurement period and paid at each milestone date. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. A majority of the goodwill generated in this acquisition will be deductible for tax purposes. Camp Chef is an immaterial acquisition to our company.
Acquisition of Action Sports
On April 1, 2016, we completed the acquisition of BRG Sports Inc.’s Action Sports division, operated by Bell Sports Corp. ("Action Sports"). The acquisition includes brands Bell, Giro, Blackburn, CoPilot, Krash, and Raskullz. Under the terms of the transaction, we paid $400,000, subject to customary working capital adjustments, utilizing cash on hand and borrowings under our existing credit facilities, and additional contingent consideration payable if incremental profitability growth milestones within the Bell Powersports product line are achieved. We determined a value of the future contingent consideration as of the acquisition date of $4,272 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 grant. 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.
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 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.
Acquisition of CamelBak Products
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 existing 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 purification and filtration systems. CamelBak has approximately 300 employees worldwide. The purchase price allocation was completed during the quarter ended October 2, 2016. A portion of the goodwill generated in this acquisition will be deductible for tax purposes.
Acquisition of Jimmy Styks
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 grant. 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. As of January 1, 2017, the value of the future contingent consideration was $1,075. The reduction from the original estimate was primarily a result of not achieving the first growth milestone.
8
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
4. Acquisitions (Continued)
The purchase price allocation was completed during the quarter ended October 2, 2016. The majority of the goodwill generated in this acquisition will be deductible for tax purposes. Jimmy Styks is an immaterial acquisition to our company.
Current quarter results for acquisitions
For the quarter and nine months ended January 1, 2017, Vista Outdoor recorded sales of approximately $92,134 and $332,580 and gross profit of approximately $24,167 and $98,449, associated with the operations of these acquired businesses for periods in which they were not part of Vista Outdoor in the comparable prior year periods. Vista Outdoor recorded sales of approximately $41,265 and $65,636 for the quarter and nine months ended January 3, 2016 and gross profit of approximately $16,715 and $25,931 for the quarter and nine months ended January 3, 2016 associated with the operations of these acquired businesses. The results are reflected in the Outdoor Products segment results.
Bushnell acquisition settlement
During the nine months ended January 1, 2017, we finalized a settlement of claims that we brought against the previous owner of Bushnell Holdings and third party insurance providers relating to certain disputes arising under the purchase agreement with respect to the acquisition. A settlement was reached in which we received a total of $30,027 net of current period litigation costs associated with the claims. Separately, in accordance with the purchase agreement, we paid the previous owner for certain tax deductions in the amount of $7,136, which were taken on the final pre-acquisition income tax return of Bushnell Holdings.
Allocation of Consideration Transferred to Net Assets Acquired for Action Sports and CamelBak:
The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Action Sports acquisition and the final determination for the CamelBak acquisition. The final determination of the fair value of certain assets and liabilities for Action Sports will be completed within the required measurement period, which will be no later than 12 months from the date of acquisition. The size and breadth of the Action Sports acquisition will necessitate the use of this measurement period to adequately analyze and assess a number of the factors used in establishing the asset and liability fair values as of the acquisition date, including the significant contractual and operational factors underlying the trade name and customer relationship intangible assets and the related tax impacts of any changes made. Any potential adjustments made could be material in relation to the preliminary values presented below:
9
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
4. Acquisitions (Continued)
Action Sports Preliminary Purchase Price Allocation:
April 1, 2016 | ||||||||
Purchase price net of cash acquired: | ||||||||
Cash paid | $ | 400,000 | ||||||
Estimated earnout value | 4,272 | |||||||
Cash received for working capital | (1,289 | ) | ||||||
Total purchase price | 402,983 | |||||||
Fair value of assets acquired: | ||||||||
Receivables | $ | 79,328 | ||||||
Inventories | 56,527 | |||||||
Tradename, customer relationship, and technology intangibles | 155,100 | |||||||
Property, plant, and equipment | 34,114 | |||||||
Other assets | 6,876 | |||||||
Total assets | 331,945 | |||||||
Fair value of liabilities assumed: | ||||||||
Accounts payable | 30,240 | |||||||
Deferred tax liabilities | 46,500 | |||||||
Other liabilities | 33,168 | |||||||
Total liabilities | 109,908 | |||||||
Net assets acquired | 222,037 | |||||||
Goodwill | $ | 180,946 | ||||||
10
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
4. Acquisitions (Continued)
CamelBak Final Purchase Price Allocation:
August 3, 2015 | ||||||||
Purchase price net of cash acquired: | ||||||||
Cash paid | $ | 412,500 | ||||||
Cash paid for working capital | 8,472 | |||||||
Total purchase price | 420,972 | |||||||
Fair value of assets acquired: | ||||||||
Receivables | $ | 30,093 | ||||||
Inventories | 30,916 | |||||||
Tradename, customer relationship, and technology intangibles | 133,800 | |||||||
Property, plant, and equipment | 7,985 | |||||||
Deferred tax assets | 5,857 | |||||||
Other assets | 4,460 | |||||||
Total assets | 213,111 | |||||||
Fair value of liabilities assumed: | ||||||||
Accounts payable | 8,219 | |||||||
Other liabilities | 11,479 | |||||||
Total liabilities | 19,698 | |||||||
Net assets acquired | 193,413 | |||||||
Goodwill | $ | 227,559 | ||||||
Intangible assets above include:
Value | Useful life (years) | ||||||
Action Sports | |||||||
Indefinite lived tradenames | $ | 76,700 | Indefinite | ||||
Definite lived tradenames | 1,400 | 15 | |||||
Customer relationships | 74,700 | 15-20 | |||||
Technology | 2,300 | 10 | |||||
CamelBak | |||||||
Indefinite lived tradename | $ | 79,400 | Indefinite | ||||
Customer relationships | 49,400 | 10-20 | |||||
Technology | 5,000 | 7-17 | |||||
11
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
4. Acquisitions (Continued)
Supplemental Pro Forma Data for Action Sports and CamelBak:
We used the acquisition method of accounting to account for these acquisitions and, accordingly, the results of Action Sports and CamelBak are included in our consolidated financial statements for the period subsequent to the date of acquisition. The following unaudited supplemental pro forma data for the quarter and nine months ended January 1, 2017 and January 3, 2016 present consolidated information as if the CamelBak acquisition had been completed on April 1, 2014 and the Action Sports acquisition had been completed on April 1, 2015. The pro forma results were calculated by combining our results with the standalone results of Action Sports and CamelBak for the pre-acquisition periods, which were adjusted to account for certain costs which would have been incurred during this pre-acquisition period:
Quarter ended | Nine months ended | |||||||||||||||
(Amounts in thousands except per share data) | January 1, 2017 | January 3, 2016 | January 1, 2017 | January 3, 2016 | ||||||||||||
Sales | $ | 653,558 | $ | 670,771 | $ | 1,968,139 | $ | 1,969,945 | ||||||||
Net income (loss) | (377,659 | ) | 46,103 | (273,858 | ) | 120,845 | ||||||||||
Basic earnings (loss) per common share | (6.48 | ) | 0.75 | (4.60 | ) | 1.94 | ||||||||||
Diluted earnings (loss) per common share | (6.44 | ) | 0.74 | (4.58 | ) | 1.93 | ||||||||||
The unaudited supplemental pro forma data above include the following significant non-recurring adjustments made to account for certain costs which would have been incurred if the CamelBak acquisition had been completed on April 1, 2014 and the Action Sports acquisition had been completed on April 1, 2015, as adjusted for the applicable tax impact:
Quarter ended | Nine months ended | |||||||||||||||
January 1, 2017 | January 3, 2016 | January 1, 2017 | January 3, 2016 | |||||||||||||
Inventory step-up, net(1) | $ | — | $ | (313 | ) | $ | (502 | ) | $ | (145 | ) | |||||
Fees for advisory, legal, accounting services(2) | — | (56 | ) | (946 | ) | (3,331 | ) | |||||||||
(1) Adjustment reflects the increased cost of goods sold expense resulting from the fair value step-up in inventory of $817 for Action Sports and $1,043 for CamelBak which was expensed over the first inventory cycle.
(2) We removed the fees that were incurred in connection with the acquisition of Action Sports from fiscal 2017 and considered those fees as incurred during the first quarter of fiscal 2016. Costs were recorded in Selling, general, and administrative expense. We have incurred total of $2,837 in fees in connection with the acquisition of Action Sports during fiscal 2016 and 2017. We removed the fees that were incurred in connection with the acquisition of CamelBak from fiscal 2016 and considered those fees as incurred during the first quarter of fiscal 2015.
5. Net Receivables
Net receivables are summarized as follows:
January 1, 2017 | March 31, 2016 | |||||||
Trade receivables | $ | 553,932 | $ | 446,032 | ||||
Other receivables | 3,023 | 1,778 | ||||||
Less: allowance for doubtful accounts and discounts | (23,621 | ) | (19,412 | ) | ||||
Net receivables | $ | 533,334 | $ | 428,398 | ||||
One customer represented 12% and 13% of the total trade receivables balance as of January 1, 2017 and March 31, 2016, respectively.
12
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
6. Net Inventories
Net inventories consist of the following:
January 1, 2017 | March 31, 2016 | |||||||
Raw materials | $ | 116,220 | $ | 91,898 | ||||
Work in process | 58,468 | 61,864 | ||||||
Finished goods | 410,428 | 286,478 | ||||||
Net inventories | $ | 585,116 | $ | 440,240 | ||||
7. Accumulated Other Comprehensive Loss
The components of AOCL, net of income taxes, are as follows:
January 1, 2017 | March 31, 2016 | |||||||
Pension and other postretirement benefits | $ | (60,781 | ) | $ | (63,667 | ) | ||
Cumulative translation adjustment | (61,802 | ) | (46,547 | ) | ||||
Total AOCL | $ | (122,583 | ) | $ | (110,214 | ) | ||
The following tables summarize the changes in the balance of AOCL, net of income tax:
Quarter ended January 1, 2017 | Nine months ended January 1, 2017 | ||||||||||||||||||||||
Pension and other postretirement benefits | Cumulative translation adjustment | Total | Pension and other postretirement benefits | Cumulative translation adjustment | Total | ||||||||||||||||||
Beginning balance in AOCL | $ | (61,743 | ) | $ | (51,091 | ) | $ | (112,834 | ) | $ | (63,667 | ) | $ | (46,547 | ) | $ | (110,214 | ) | |||||
Net actuarial losses reclassified from AOCL (1) | 1,236 | — | 1,236 | 3,708 | — | 3,708 | |||||||||||||||||
Prior service costs reclassified from AOCL (1) | (274 | ) | — | (274 | ) | (822 | ) | — | (822 | ) | |||||||||||||
Net change in cumulative translation adjustment | — | (10,711 | ) | (10,711 | ) | — | (15,255 | ) | (15,255 | ) | |||||||||||||
Ending balance in AOCL | $ | (60,781 | ) | $ | (61,802 | ) | $ | (122,583 | ) | $ | (60,781 | ) | $ | (61,802 | ) | $ | (122,583 | ) | |||||
(1) | Amounts related to our pension and other postretirement benefits that were reclassified from AOCL were recorded as a component of net periodic benefit cost for each period presented. |
Quarter ended January 3, 2016 | Nine months ended January 3, 2016 | ||||||||||||||||||||||||||||||
Derivatives | Pension and other postretirement benefits | Cumulative translation adjustment | Total | Derivatives | Pension and other postretirement benefits | Cumulative translation adjustment | Total | ||||||||||||||||||||||||
Beginning balance in AOCL | $ | 86 | $ | (55,927 | ) | $ | (56,197 | ) | $ | (112,038 | ) | $ | — | $ | (58,155 | ) | $ | (52,148 | ) | $ | (110,303 | ) | |||||||||
Net increase in fair value of derivatives | 114 | — | — | 114 | 232 | — | — | 232 | |||||||||||||||||||||||
Net losses reclassified from AOCL, offsetting the price paid to suppliers (1) | (117 | ) | — | — | (117 | ) | (149 | ) | — | — | (149 | ) | |||||||||||||||||||
Net actuarial losses reclassified from AOCL (2) | — | 1,381 | — | 1,381 | — | 4,143 | — | 4,143 | |||||||||||||||||||||||
Prior service costs reclassified from AOCL (2) | — | (267 | ) | — | (267 | ) | — | (801 | ) | — | (801 | ) | |||||||||||||||||||
Net change in cumulative translation adjustment | — | — | (788 | ) | (788 | ) | — | — | (4,837 | ) | (4,837 | ) | |||||||||||||||||||
Ending balance in AOCL | $ | 83 | $ | (54,813 | ) | $ | (56,985 | ) | $ | (111,715 | ) | $ | 83 | $ | (54,813 | ) | $ | (56,985 | ) | $ | (111,715 | ) | |||||||||
(1) Amounts related to our derivative instruments that were reclassified from AOCL and recorded as a component of cost of sales.
(2) Amounts related to our pension and other postretirement benefits that were reclassified from AOCL were recorded as a component of net periodic benefit cost for each period presented.
13
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
8. Goodwill and Net Intangible Assets
The changes in the carrying amount of goodwill by segment were as follows:
Outdoor Products | Shooting Sports | Total | ||||||||||
Balance, March 31, 2016 | $ | 818,560 | $ | 204,891 | $ | 1,023,451 | ||||||
Acquisitions | 192,820 | — | 192,820 | |||||||||
Impairment | (353,915 | ) | — | (353,915 | ) | |||||||
Effect of foreign currency exchange rates | (6,941 | ) | (200 | ) | (7,141 | ) | ||||||
Balance, January 1, 2017 | $ | 650,524 | $ | 204,691 | $ | 855,215 | ||||||
The acquisitions in Outdoor Products related to the preliminary purchase price allocations for Action Sports and Camp Chef as previously discussed.
A challenging retail environment and other market pressures resulted in deeper discounting of Vista Outdoor’s accessories products during the quarter ending January 1, 2017. The deeper discounting caused a reduction in the projected cash flows of the Hunting and Shooting Accessories reporting unit. Given this drop in projected cash flows and a continued challenging retail environment, we determined a triggering event had occurred. The triggering event indicated it was more likely than not that the fair value of the reporting unit was less than the book value of the reporting unit. The fair value of the 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, which is 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.
The goodwill recorded within the Outdoor Products segment above is presented net of $353,915 in current period impairment losses. In addition, as a result of the factors noted above, we evaluated the fair value of the other intangibles assets as well. We determined the fair value of the trade names and technology based on the relief of royalty method and used royalty rates in a range of .5% to 5% for the trade names and a royalty rate of .5% on technologies based on public guideline royalty-based transactions and profitability and a discount rate of 9.5%. This analysis resulted in a $34,230 non-cash impairment charge on non-amortizing trade names related primarily to the Bushnell trade name. The analysis also resulted in a $61,054 non-cash impairment charge related to a number of amortizing trade name and technology intangibles associated with the Bushnell acquisition completed in fiscal 2014 and the Blackhawk tradename. The remeasurement of goodwill and intangible assets is classified as a Level 3 fair value assessment as described in Note 2 due to the significance of unobservable inputs developed using company-specific information.
The goodwill recorded within the Outdoor Products and Shooting Sports segments are presented net of $47,791 and $41,020 of accumulated impairment losses, respectively, recorded prior to March 31, 2016.
Net intangibles consisted of the following:
January 1, 2017 | March 31, 2016 | |||||||||||||||||||||||
Gross carrying amount | Accumulated amortization | Total | Gross carrying amount | Accumulated amortization | Total | |||||||||||||||||||
Trade names | $ | 106,159 | $ | (15,110 | ) | $ | 91,049 | $ | 185,162 | $ | (46,812 | ) | $ | 138,350 | ||||||||||
Patented technology | 19,066 | (7,470 | ) | 11,596 | 27,900 | (9,949 | ) | 17,951 | ||||||||||||||||
Customer relationships and other | 370,326 | (70,773 | ) | 299,553 | 272,431 | (50,757 | ) | 221,674 | ||||||||||||||||
Total | 495,551 | (93,353 | ) | 402,198 | 485,493 | (107,518 | ) | 377,975 | ||||||||||||||||
Non-amortizing trade names | 314,967 | — | 314,967 | 272,497 | — | 272,497 | ||||||||||||||||||
Net intangibles | $ | 810,518 | $ | (93,353 | ) | $ | 717,165 | $ | 757,990 | $ | (107,518 | ) | $ | 650,472 | ||||||||||
14
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
8. Goodwill and Net Intangible Assets (Continued)
The gross amount of amortizing and non-amortizing intangible assets increased from March 31, 2016 due to the acquisitions of Action Sports and Camp Chef partially offset by the impairments noted above. The assets in the table above are being amortized using a straight-line method over a weighted average remaining period of approximately 13.0 years. Amortization expense for the quarters and nine month periods ended January 1, 2017 and January 3, 2016 was $10,627 and $8,951 and $31,020 and $24,602, respectively. We expect amortization expense related to these assets to be as follows:
Remainder of fiscal 2017 | $ | 9,204 | ||
Fiscal 2018 | 36,816 | |||
Fiscal 2019 | 34,072 | |||
Fiscal 2020 | 33,245 | |||
Fiscal 2021 | 33,229 | |||
Thereafter | 255,632 | |||
Total | $ | 402,198 | ||
15
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
9. Other Current and Non-current Liabilities
Other current and non-current liabilities consisted of the following:
January 1, 2017 | March 31, 2016 | |||||||
Other current liabilities: | ||||||||
In-transit inventory and other | $ | 82,962 | $ | 40,242 | ||||
Rebate | 46,501 | 17,957 | ||||||
Accrued advertising | 15,424 | 10,315 | ||||||
Employee benefits and insurance | 12,221 | 11,131 | ||||||
Warranty | 9,117 | 8,611 | ||||||
Interest | 5,559 | 13,157 | ||||||
Customer obligations | 2,975 | 9,613 | ||||||
Freight accrual | 2,499 | 2,446 | ||||||
Accrued taxes | 2,350 | 1,303 | ||||||
Product liability | 1,813 | 1,622 | ||||||
Total other current liabilities | $ | 181,421 | $ | 116,397 | ||||
Other non-current liabilities: | ||||||||
Non-current portion of accrued income tax liability | $ | 27,097 | $ | 25,421 | ||||
Contingent consideration and deferred purchase price | 8,044 | 4,471 | ||||||
Product liability | 4,193 | — | ||||||
Management non-qualified deferred compensation plan | 3,185 | 2,668 | ||||||
Environmental remediation | 740 | 745 | ||||||
Other | 21,472 | 18,014 | ||||||
Total other non-current liabilities | $ | 64,731 | $ | 51,319 | ||||
We provide consumer warranties against manufacturing defects on certain products within the Outdoor Products and Shooting Sports segments with warranty periods ranging typically from one year to a lifetime. The estimated costs of such product warranties are recorded at the time the sale is recorded based upon actual past experience, our current production environment as well as specific and identifiable warranties as applicable. The warranty liability recorded at each balance sheet date reflects the estimated liability for warranty coverage for products delivered based on historical information and current trends. The following is a reconciliation of the changes in our product warranty liability during the period presented:
Balance, March 31, 2016 | $ | 8,611 | |
Payments made | (2,992 | ) | |
Warranties issued | 2,575 | ||
Warranties assumed in acquisition | 1,159 | ||
Changes related to preexisting warranties | (236 | ) | |
Balance, January 1, 2017 | $ | 9,117 | |
16
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data and unless otherwise indicated)
10. Long-term Debt
Long-term debt, including the current portion, consisted of the following:
January 1, 2017 | March 31, 2016 | |||||||
Senior Credit Facility: | ||||||||
Term Loan | $ | 616,000 | $ | 332,500 | ||||
Revolving Credit Facility | 190,000 | — | ||||||
Total principal amount of Credit Agreement | 806,000 | 332,500 | ||||||
5.875% Senior Notes due 2023 | 350,000 | 350,000 | ||||||
Principal amount of long-term debt | 1,156,000 | 682,500 | ||||||
Less: unamortized deferred financing costs | 12,399 | 12,213 | ||||||
Carrying amount of long-term debt | 1,143,601 | 670,287 | ||||||
Less: current portion | 222,000 | 17,500 | ||||||
Carrying amount of long-term debt, excluding current portion | $ | 921,601 | $ | 652,787 | ||||
Credit Agreement
On April 1, 2016, we entered into an Amended and Restated Credit Agreement (the “2016 Credit Agreement”), which replaced our 2014 Credit Agreement. The 2016 Credit Agreement is comprised of a Term A Loan of $640,000 and a $400,000 Revolving Credit Facility, both of which mature on April 1, 2021. The Term A Loan is subject to quarterly principal payments of $8,000, with the remaining balance due on April 1, 2021. Borrowings under the 2016 Credit Agreement bear interest at a rate equal to either the sum of a base rate plus a specified margin or the sum of a Eurodollar rate plus a specified margin. Each margin is based on our consolidated leverage ratio, as defined in the 2016 Credit Agreement. Based on the ratio in effect as of January 1, 2017, the base rate margin was 0.75% and the Eurodollar margin was 1.75%. The weighted average interest rate for our borrowings under the 2016 Credit Agreement as of January 1, 2017 was 2.41%. We pay a commitment fee on the unused portion of the Revolving Credit Facility based on our consolidated leverage ratio, and based on the current ratio, this fee is 0.30%. As of January 1, 2017, we had $190,000 in borrowings against our $400,000 Revolving Credit Facility and had outstanding letters of credit of $26,015, which reduced amounts available on the Revolving Credit Facility to $183,985.
With the exception of assets owned by the legal entities operating the Camp Chef business, substantially all domestic tangible and intangible assets of Vista Outdoor and its subsidiaries, as well as the tangible and intangible assets of Advanced Arrow S. de R.L. de C.V. and Hydrosport, S. de R.L. de C.V., are pledged as collateral under the 2016 Credit Agreement. The domestic tangible and intangible assets of Camp Chef are expected to be pledged as collateral during fiscal 2017. Debt issuance costs of approximately $12,000 are being amortized over the term of the 2016 Credit Agreement.
In fiscal 2014, we entered into a credit agreement (the "2014 Credit Agreement"), which was comprised of a Term A Loan of $350,000 and a Revolving Credit Facility of $400,000, both of which were to mature on February 9, 2020. During the quarter ended July 3, 2016, we refinanced this agreement as noted above. In connection with this transaction, we wrote off $1,521 of unamortized deferred debt issuance costs in the nine months ended January 1, 2017.
5.875% Notes
On August 11, 2015, we issued $350,000 aggregate principal amount of 5.875% Senior Notes (the "5.875% Notes") that mature on October 1, 2023. These notes are unsecured and senior obligations. Interest on these notes is payable semi-annually in arrears on April 1 and October 1 of each year, starting on April 1, 2016. We have the right to redeem some or all of these notes from time to time on or after October 1, 2018, at specified redemption prices. Prior to October 1, 2018, we may redeem some or all of these notes at a price equal to 100% of their principal amount plus accrued and unpaid interest to the date of redemption and a specified make-whole premium. In addition, prior to October 1, 2018, we may redeem up to 35% of the aggregate principal amount of these notes with the net cash proceeds of certain equity offerings, at a price equal to 105.875% of their principal amount plus accrued and unpaid interest to the date of redemption. Debt issuance costs of approximately $4,300 are being amortized to interest expense over 8 years, the term of the notes.
17
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
10. Long-term Debt (Continued)
Rank and Guarantees
The 2016 Credit Agreement obligations are guaranteed on a secured basis, jointly and severally and fully and unconditionally by substantially all of our domestic subsidiaries, with the exception of the legal entities operating the Camp Chef business, and by Advanced Arrow S. de R.L. de C.V. and Hydrosport, S. de R.L. de C.V.. Vista Outdoor (the parent company issuer) has no independent assets or operations. We own 100% of all of these guarantor subsidiaries. The 5.875% Notes are senior unsecured obligations and will rank equally in right of payment with any future senior unsecured indebtedness and senior in right of payment to any future subordinated indebtedness. The 5.875% Notes are fully and unconditionally guaranteed, jointly and severally, by our existing and future domestic subsidiaries that guarantee indebtedness under our 2016 Credit Agreement or that guarantee certain of our other indebtedness, or indebtedness of any subsidiary guarantor, in an aggregate principal amount in excess of $50,000. These guarantees are senior unsecured obligations of the applicable subsidiary guarantors. The guarantee by any subsidiary guarantor of our obligations in respect of the 5.875% Notes will be released in any of the following circumstances:
• | if, as a result of the sale of its capital stock, such subsidiary guarantor ceases to be a restricted subsidiary; |
• | if such subsidiary guarantor is designated as an “Unrestricted Subsidiary;” |
• | upon defeasance or satisfaction and discharge of the 5.875% Notes; or |
• | if such subsidiary guarantor has been released from its guarantees of indebtedness under the 2016 Credit Agreement and all capital markets debt securities. |
The guarantee by any subsidiary guarantor of our obligations in respect of the 2016 Credit Agreement will be released in any of the following circumstances:
• | if, as a result of the sale of its capital stock, such subsidiary guarantor ceases to be a subsidiary; |
• | if such subsidiary guarantor ceases to be a Domestic Subsidiary; or |
• | upon repayment of all obligations under the 2016 Credit Agreement. |
Cash Paid for Interest on Debt
Cash paid for interest on debt, including commitment fees, for the nine months ended January 1, 2017 and January 3, 2016 totaled $15,034 and $6,387, respectively.
11. Employee Benefit Plans
The total expense for employee benefit plans for the quarter and nine months ended January 1, 2017 and January 3, 2016 was $1,690 and $1,825, and $5,072 and $5,475 respectively.
Employer Contributions. During the nine months ended January 1, 2017, we made the legally required minimum contribution of $4,400 directly to the pension trust, and no contributions to our other postretirement benefit plans. We made distributions of $10 directly to retirees under the non-qualified supplemental executive retirement plan. During the nine months ended January 3, 2016, we contributed $2,000 directly to the pension trust, made no contributions to our other postretirement benefit plans, and made no distributions to retirees under the non-qualified supplemental executive retirement plan. There are no additional contributions expected to be made directly to the pension trust and we expect to contribute approximately $174 to our other postretirement benefit plans, and distribute approximately $688 directly to retirees under our non-qualified supplemental executive retirement plans during the remainder of fiscal 2017.
12. Income Taxes
Our provision for income taxes includes federal, foreign, and state income taxes. Income tax provisions for interim periods are based on estimated effective annual income tax rates.
The income tax provisions for the quarters ended January 1, 2017 and January 3, 2016 represent effective tax rates of 4.4% and 36.0%, respectively. The change in the rate from the prior year quarter is primarily caused by the goodwill impairment charge in the current quarter that is nondeductible for tax purposes.
18
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
12. Income Taxes (Continued)
The income tax provision for the nine months ended January 1, 2017 and January 3, 2016 represent effective tax rates of (8.5)% and 38.4%, respectively. The decrease in the rate from the prior year period is primarily caused by the nondeductible goodwill impairment charge partially offset by a nontaxable acquisition claim settlement gain.
The 4.4% effective tax rate for the quarter ended January 1, 2017 differs from the statutory federal income tax rate of 35% primarily as a result of the nondeductible goodwill impairment charge. The (8.5)% effective tax rate for the nine months ended January 1, 2017 differs from the statutory federal income tax rate of 35% primarily as a result of the nondeductible goodwill impairment charge partially offset by the nontaxable treatment of the acquisition claim settlement gain related to the Bushnell acquisition.
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 distribution of all of the shares of our common stock on a pro rata basis to the holders of Alliant Techsystems Inc. common stock (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 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. 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 filed income tax returns in foreign jurisdictions. After the Spin-Off we are 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 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 2014 and is currently auditing Orbital ATK for fiscal 2015. The IRS is currently auditing our tax return for the period that begins after the Spin-Off (February 9, 2015) 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.
Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $2,512 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 $1,726.
13. 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 potentially responsible party (“PRP”), along with other parties, in a regulatory agency action 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. We have recorded a liability for environmental remediation of $765 as of January 1, 2017 and March 31, 2016.
We could incur substantial additional costs, including cleanup costs, resource restoration, fines, and penalties or third-party property damage or personal injury claims, as a result of violations or liabilities under environmental laws or non-compliance with environmental permits. While environmental laws and regulations have not had a material adverse effect on
19
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data and unless otherwise indicated)
13. Contingencies (Continued)
our operating results, financial condition, or cash flows in the past, and we have environmental management programs in place to mitigate these risks, it is difficult to predict whether they will have a material impact in the future.
14. Condensed Consolidating Financial Statements
The 5.875% Notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally by substantially all of our domestic subsidiaries with the exception of the legal entities operating the Camp Chef business, and by Advanced Arrow S. de R.L. de C.V. and Hydrosport, S. de R.L. de C.V.
The parent company has no independent assets or operations. All of these guarantor subsidiaries are 100% owned by Vista Outdoor. These guarantees are senior or senior subordinated obligations, as applicable, of the applicable subsidiary guarantors. In conjunction with the registration of the 5.875% Notes the consolidating financial information of the guarantor and non-guarantor subsidiaries is presented on the following pages.
The guarantee by any subsidiary guarantor of our obligations in respect of the 5.875% Notes will be released in any of the following circumstances:
• if, as a result of the sale of its capital stock, such subsidiary guarantor ceases to be a restricted subsidiary;
• if such subsidiary guarantor is designated as an “Unrestricted Subsidiary;”
• upon defeasance or satisfaction and discharge of the 5.875% Notes; or
• | if such subsidiary guarantor has been released from its guarantees of indebtedness under the Credit Agreement and all capital markets debt securities. |
20
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
14. Condensed Consolidating Financial Statements (Continued)
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Quarter ended January 1, 2017 | ||||||||||||||||||||
(Amounts in thousands) | Parent Issuer | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Sales, net | $ | — | $ | 619,140 | $ | 69,504 | $ | (35,086 | ) | $ | 653,558 | |||||||||
Cost of sales | — | 469,600 | 49,804 | (34,452 | ) | 484,952 | ||||||||||||||
Gross profit | — | 149,540 | 19,700 | (634 | ) | 168,606 | ||||||||||||||
Operating expenses: | ||||||||||||||||||||
Research and development | — | 8,020 | 150 | — | 8,170 | |||||||||||||||
Selling, general, and administrative | — | 80,748 | 15,145 | — | 95,893 | |||||||||||||||
Goodwill and intangibles impairment | — | 449,199 | — | — | 449,199 | |||||||||||||||
Income (loss) before interest and income taxes | — | (388,427 | ) | 4,405 | (634 | ) | (384,656 | ) | ||||||||||||
Equity in income of subsidiaries | (371,067 | ) | 2,179 | — | 368,888 | — | ||||||||||||||
Interest expense, net | (10,551 | ) | — | — | — | (10,551 | ) | |||||||||||||
Income (loss) before income taxes | (381,618 | ) | (386,248 | ) | 4,405 | 368,254 | (395,207 | ) | ||||||||||||
Income tax provision (benefit) | (3,959 | ) | (15,181 | ) | 1,838 | (246 | ) | (17,548 | ) | |||||||||||
Net income (loss) | $ | (377,659 | ) | $ | (371,067 | ) | $ | 2,567 | $ | 368,500 | $ | (377,659 | ) | |||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
Net income (loss) (from above) | $ | (377,659 | ) | $ | (371,067 | ) | $ | 2,567 | $ | 368,500 | $ | (377,659 | ) | |||||||
Total other comprehensive loss | (9,749 | ) | (9,749 | ) | (10,711 | ) | 20,460 | (9,749 | ) | |||||||||||
Comprehensive income (loss) | $ | (387,408 | ) | $ | (380,816 | ) | $ | (8,144 | ) | $ | 388,960 | $ | (387,408 | ) | ||||||
21
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
14. Condensed Consolidating Financial Statements (Continued)
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(unaudited)
Quarter ended January 3, 2016 | ||||||||||||||||||||
(Amounts in thousands) | Parent Issuer | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Sales, net | $ | — | $ | 561,252 | $ | 56,594 | $ | (25,289 | ) | $ | 592,557 | |||||||||
Cost of sales | — | 414,422 | 36,393 | (25,762 | ) | 425,053 | ||||||||||||||
Gross profit | — | 146,830 | 20,201 | 473 | 167,504 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Research and development | — | 3,681 | — | — | 3,681 | |||||||||||||||
Selling, general, and administrative | — | 75,628 | 12,963 | — | 88,591 | |||||||||||||||
Income before interest and income taxes | — | 67,521 | 7,238 | 473 | 75,232 | |||||||||||||||
Equity in income of subsidiaries | 48,017 | 5,653 | — | (53,670 | ) | — | ||||||||||||||
Interest expense, net | (7,776 | ) | — | — | — | (7,776 | ) | |||||||||||||
Income before income taxes | 40,241 | 73,174 | 7,238 | (53,197 | ) | 67,456 | ||||||||||||||
Income tax provision (benefit) | (2,918 | ) | 25,157 | 1,876 | 182 | 24,297 | ||||||||||||||
Net income | $ | 43,159 | $ | 48,017 | $ | 5,362 | $ | (53,379 | ) | $ | 43,159 | |||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||
Net income (from above) | $ | 43,159 | $ | 48,017 | $ | 5,362 | $ | (53,379 | ) | $ | 43,159 | |||||||||
Total other comprehensive income (loss) | 323 | 323 | (788 | ) | 465 | 323 | ||||||||||||||
Comprehensive income | $ | 43,482 | $ | 48,340 | $ | 4,574 | $ | (52,914 | ) | $ | 43,482 | |||||||||
22
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
(Amounts in thousands except share and per share data unless otherwise indicated)
14. Condensed Consolidating Financial Statements (Continued)
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Nine months ended January 1, 2017 | ||||||||||||||||||||
(Amounts in thousands) | Parent Issuer | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Sales, net | $ | — | $ | 1,872,948 | $ | 184,763 | $ | (89,572 | ) | $ | 1,968,139 | |||||||||
Cost of sales | — | 1,407,821 | 123,601 | (88,675 | ) | 1,442,747 | ||||||||||||||
Gross profit | — | 465,127 | 61,162 | (897 | ) | 525,392 | ||||||||||||||
Operating expenses: | ||||||||||||||||||||
Research and development | — | 23,957 | 194 | — | 24,151 | |||||||||||||||
Selling, general, and administrative | — | 258,027 | 45,033 | — | 303,060 | |||||||||||||||
Acquisition claim settlement gain, net | (30,027 | ) | — | — | — | (30,027 | ) | |||||||||||||
Goodwill and intangibles impairment | — | 449,199 | — | — | 449,199 | |||||||||||||||
Income (loss) before interest and income taxes | 30,027 | (266,056 | ) | 15,935 | (897 | ) | (220,991 | ) | ||||||||||||
Equity in income of subsidiaries | (284,930 | ) | 9,433 | — | 275,497 | — | ||||||||||||||
Interest expense, net | (32,657 | ) | — | — | — | (32,657 | ) | |||||||||||||
Income (loss) before income taxes | (287,560 | ) | (256,623 | ) | 15,935 | 274,600 | (253,648 | ) | ||||||||||||
Income tax provision (benefit) | (12,249 | ) | 28,307 | 5,936 | (331 | ) | 21,663 | |||||||||||||
Net income (loss) | $ | (275,311 | ) | $ | (284,930 | ) | $ | 9,999 | $ | 274,931 | $ | (275,311 | ) | |||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||
Net income (loss)(from above) | $ | (275,311 | ) | $ | (284,930 | ) | $ | 9,999 | $ | 274,931 | $ | (275,311 | ) | |||||||
Total other comprehensive loss | (12,369 | |||||||||||||||||||