UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the quarterly period ended June 25, 2023
| ☐ | 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 | 47-1016855 | ||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 1 Vista Way | Anoka | MN | 55303 | ||||||||
(Address of Principal Executive Offices) | (Zip Code) | ||||||||||
Registrant's telephone number, including area code: (763) 433-1000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $.01 | VSTO | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 24, 2023, there were 58,004,682 shares of the registrant's common stock outstanding.
TABLE OF CONTENTS
1
PART I— FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| (Amounts in thousands except share data) | June 25, 2023 | March 31, 2023 | ||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 63,163 | $ | 86,208 | ||||||||||
| Net receivables | 391,464 | 339,373 | ||||||||||||
| Net inventories | 710,020 | 709,897 | ||||||||||||
| Other current assets | 53,461 | 60,636 | ||||||||||||
| Total current assets | 1,218,108 | 1,196,114 | ||||||||||||
| Net property, plant, and equipment | 221,137 | 228,247 | ||||||||||||
| Operating lease assets | 107,318 | 106,828 | ||||||||||||
| Goodwill | 465,709 | 465,709 | ||||||||||||
| Net intangible assets | 720,528 | 733,176 | ||||||||||||
| Deferred charges and other non-current assets, net | 76,925 | 68,808 | ||||||||||||
| Total assets | $ | 2,809,725 | $ | 2,798,882 | ||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current portion of long-term debt | $ | 100,000 | $ | 65,000 | ||||||||||
| Accounts payable | 156,337 | 136,556 | ||||||||||||
| Accrued compensation | 46,186 | 60,719 | ||||||||||||
| Accrued income taxes | 21,516 | 6,676 | ||||||||||||
| Federal excise, use, and other taxes | 35,592 | 38,543 | ||||||||||||
| Other current liabilities | 162,370 | 146,377 | ||||||||||||
| Total current liabilities | 522,001 | 453,871 | ||||||||||||
| Long-term debt | 886,005 | 984,658 | ||||||||||||
| Deferred income tax liabilities | 41,994 | 40,749 | ||||||||||||
| Long-term operating lease liabilities | 103,820 | 103,313 | ||||||||||||
| Accrued pension and postemployment benefits | 24,717 | 25,114 | ||||||||||||
| Other long-term liabilities | 51,186 | 59,384 | ||||||||||||
| Total liabilities | 1,629,723 | 1,667,089 | ||||||||||||
| Commitments and contingencies (Notes 12 and 15) | ||||||||||||||
Common stock — $.01 par value: | ||||||||||||||
Authorized — 500,000,000 shares | ||||||||||||||
Issued and outstanding — 57,997,650 shares as of June 25, 2023 and 57,085,756 shares as of March 31, 2023 | 579 | 570 | ||||||||||||
| Additional paid-in capital | 1,656,558 | 1,711,155 | ||||||||||||
| Accumulated deficit | (172,428) | (230,528) | ||||||||||||
| Accumulated other comprehensive loss | (78,002) | (80,802) | ||||||||||||
Common stock in treasury, at cost — 5,966,789 shares held as of June 25, 2023 and 6,878,683 shares held as of March 31, 2023 | (226,705) | (268,602) | ||||||||||||
| Total stockholders' equity | 1,180,002 | 1,131,793 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 2,809,725 | $ | 2,798,882 | ||||||||||
See Notes to the Condensed Consolidated Financial Statements.
2
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
| Three months ended | ||||||||||||||
| (Amounts in thousands except per share data) | June 25, 2023 | June 26, 2022 | ||||||||||||
| Sales, net | $ | 693,333 | $ | 802,612 | ||||||||||
| Cost of sales | 466,576 | 509,142 | ||||||||||||
| Gross profit | 226,757 | 293,470 | ||||||||||||
| Operating expenses: | ||||||||||||||
| Research and development | 12,080 | 7,897 | ||||||||||||
| Selling, general, and administrative | 122,491 | 113,148 | ||||||||||||
| Operating income | 92,186 | 172,425 | ||||||||||||
| Other expense, net (Note 5) | (541) | — | ||||||||||||
| Interest expense, net | (16,218) | (6,310) | ||||||||||||
| Income before income taxes | 75,427 | 166,115 | ||||||||||||
| Income tax provision | (17,327) | (40,100) | ||||||||||||
| Net income | $ | 58,100 | $ | 126,015 | ||||||||||
| Earnings per common share: | ||||||||||||||
| Basic | $ | 1.01 | $ | 2.23 | ||||||||||
| Diluted | $ | 0.99 | $ | 2.16 | ||||||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||
| Basic | 57,455 | 56,486 | ||||||||||||
| Diluted | 58,541 | 58,381 | ||||||||||||
| Net income (from above) | $ | 58,100 | $ | 126,015 | ||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||
| Pension and other postretirement benefit liabilities: | ||||||||||||||
Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income, net of tax (expense) of $(176) for the three months ended June 25, 2023 and $(221) for the three months ended June 26, 2022 | 562 | 694 | ||||||||||||
Change in derivatives, net of tax (expense) benefit of $(493) for the three months ended June 25, 2023 and $690 for the three months ended June 26, 2022 | 1,574 | 9 | ||||||||||||
Change in cumulative translation adjustment, net of tax (expense) of $0 for the three months ended June 25, 2023 and $(167) for the three months ended June 26, 2022 | 664 | (473) | ||||||||||||
| Total other comprehensive income | 2,800 | 230 | ||||||||||||
| Comprehensive income | $ | 60,900 | $ | 126,245 | ||||||||||
See Notes to the Condensed Consolidated Financial Statements.
3
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Three months ended | ||||||||||||||
| (Amounts in thousands) | June 25, 2023 | June 26, 2022 | ||||||||||||
| Operating Activities: | ||||||||||||||
| Net income | $ | 58,100 | $ | 126,015 | ||||||||||
| Adjustments to net income to arrive at cash provided by operating activities: | ||||||||||||||
| Depreciation | 12,220 | 11,280 | ||||||||||||
| Amortization of intangible assets | 12,707 | 8,036 | ||||||||||||
| Amortization of deferred financing costs | 2,078 | 353 | ||||||||||||
| Change in fair value of contingent consideration | — | (112) | ||||||||||||
| Deferred income taxes | 576 | 163 | ||||||||||||
| Gain on foreign exchange | (1,272) | — | ||||||||||||
| (Gain)/loss on disposal of property, plant, and equipment | (59) | 139 | ||||||||||||
| Share-based compensation | 3,307 | 7,257 | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Net receivables | (51,915) | (73,105) | ||||||||||||
| Net inventories | (6,117) | (29,504) | ||||||||||||
| Accounts payable | 21,850 | 33,468 | ||||||||||||
| Accrued compensation | (14,546) | (36,347) | ||||||||||||
| Accrued income taxes | 16,231 | 39,342 | ||||||||||||
| Federal excise, use, and other taxes | (2,951) | 5,292 | ||||||||||||
| Pension and other postretirement benefits | 341 | 341 | ||||||||||||
| Other assets and liabilities | 23,151 | 14,959 | ||||||||||||
| Cash provided by operating activities | 73,701 | 107,577 | ||||||||||||
| Investing Activities: | ||||||||||||||
| Capital expenditures | (7,616) | (4,910) | ||||||||||||
| Proceeds from the disposition of property, plant, and equipment | 129 | 43 | ||||||||||||
| Cash used for investing activities | (7,487) | (4,867) | ||||||||||||
| Financing Activities: | ||||||||||||||
| Proceeds from credit facility | 30,000 | 15,000 | ||||||||||||
| Repayments of credit facility | (95,000) | (95,000) | ||||||||||||
| Debt issuance costs | (31) | — | ||||||||||||
| Payments on long-term debt | (90) | — | ||||||||||||
| Payments made for contingent consideration | (8,585) | — | ||||||||||||
| Proceeds from exercise of stock options | 39 | 147 | ||||||||||||
| Payment of employee taxes related to vested stock awards | (16,024) | (8,923) | ||||||||||||
| Cash used in financing activities | (89,691) | (88,776) | ||||||||||||
Effect of foreign exchange rate fluctuations on cash | 432 | 94 | ||||||||||||
| Increase (decrease) in cash and cash equivalents | (23,045) | 14,028 | ||||||||||||
| Cash and cash equivalents at beginning of period | 86,208 | 22,584 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 63,163 | $ | 36,612 | ||||||||||
| Supplemental Cash Flow Disclosures: | ||||||||||||||
| Non-cash investing activity: | ||||||||||||||
| Capital expenditures included in accounts payable | $ | 2,313 | $ | 1,701 | ||||||||||
See Notes to the Condensed Consolidated Financial Statements.
4
VISTA OUTDOOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
| (Amounts in thousands except share data) | Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Total Equity | |||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | 57,085,756 | $ | 570 | $ | 1,711,155 | $ | (230,528) | $ | (80,802) | $ | (268,602) | $ | 1,131,793 | |||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | 58,100 | 2,800 | — | 60,900 | |||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 2,410 | — | (55) | — | — | 94 | 39 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 3,307 | — | — | — | 3,307 | |||||||||||||||||||||||||||||||||||||
| Restricted stock vested and shares withheld | 901,094 | — | (57,520) | — | — | 41,483 | (16,037) | |||||||||||||||||||||||||||||||||||||
| Other | 8,390 | 9 | (329) | — | — | 320 | — | |||||||||||||||||||||||||||||||||||||
| Balance, June 25, 2023 | 57,997,650 | $ | 579 | $ | 1,656,558 | $ | (172,428) | $ | (78,002) | $ | (226,705) | $ | 1,180,002 | |||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | 56,093,456 | $ | 560 | $ | 1,730,927 | $ | (220,810) | $ | (76,679) | $ | (309,599) | $ | 1,124,399 | |||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | 126,015 | 230 | — | 126,245 | |||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 9,150 | — | (212) | — | — | 359 | 147 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 7,257 | — | — | — | 7,257 | |||||||||||||||||||||||||||||||||||||
| Restricted stock vested and shares withheld | 413,089 | — | (25,892) | — | — | 17,156 | (8,736) | |||||||||||||||||||||||||||||||||||||
| Treasury shares purchased | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Other | 8,387 | 5 | (321) | — | — | 316 | — | |||||||||||||||||||||||||||||||||||||
| Balance, June 26, 2022 | 56,524,082 | $ | 565 | $ | 1,711,759 | $ | (94,795) | $ | (76,449) | $ | (291,768) | $ | 1,249,312 | |||||||||||||||||||||||||||||||
See Notes to the Condensed Consolidated Financial Statements.
5
VISTA OUTDOOR INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended June 25, 2023
(Amounts in thousands except per share data and unless otherwise indicated)
1. The Company and Basis of Presentation
Nature of Operations—Vista Outdoor Inc. (together with our subsidiaries, "Vista Outdoor", "we", "our", and "us", unless the context otherwise requires) is a leading global designer, manufacturer, and marketer of outdoor recreation and shooting sports products. We operate through two reportable segments, Sporting Products and Outdoor Products. We are headquartered in Anoka, Minnesota and have manufacturing and distribution facilities in the United States, Canada, Mexico, and Puerto Rico along with international customer service, sales and sourcing operations in Asia and Europe. We have a robust global distribution network serving customers in over 100 countries. Vista Outdoor was incorporated in Delaware in 2014.
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 normally are required by accounting principles generally accepted in the United States have been condensed or omitted. Management is responsible for the unaudited condensed consolidated financial statements included in this report, which in the opinion of management, include all adjustments necessary for a fair presentation of our financial position, results of operations, and cash flows for the periods and dates presented. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (“fiscal year 2023”), which was filed with the SEC on May 25, 2023.
Change in Presentation—In connection with our preparation of the condensed consolidated financial statements for the three months ended June 25, 2023, we changed the presentation of "Earnings before interest and income taxes" to "Operating income" within the consolidated statements of comprehensive income. This correction did not affect previously reported net income and is immaterial to the previously issued financial statements.
New Accounting Pronouncements—Our accounting policies are described in Note 1 of the audited consolidated financial statements in our Annual Report on Form 10-K for fiscal year 2023, which was filed with the SEC on May 25, 2023. Such significant accounting policies are applicable for periods prior to the following new accounting standards.
Accounting Standards Adopted During this Fiscal Year—In September 2022, the FASB issued ASU 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which requires a buyer in a supplier finance program to disclose qualitative and quantitative information about its program to allow a user of the financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The amendments in ASU 2022-04 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with the exception for the amendment on roll-forward information, which is effective for fiscal years beginning after December 15, 2023. The guidance should be applied retrospectively, except for the amendment on roll-forward information, which should be applied prospectively. This ASU was effective for us in the first quarter of fiscal year 2024, with the exception of the amendment on roll-forward information, which will be effective for us in our Form 10-K for fiscal year 2025. We adopted this ASU during the first quarter of fiscal 2024 and the adoption did not have an impact on our condensed consolidated financial statement disclosures.
2. Fair Value of Financial Instruments
The following section describes the valuation methodologies we use to measure our financial instruments at fair value on a recurring basis:
Derivative Financial Instruments
Hedging instruments (See Note 5, Derivative Financial Instruments) and ( Note 12, Long-term Debt) are re-measured on a recurring basis using broker quotes, daily market foreign currency rates and interest rate curves as applicable and are therefore categorized within Level 2 of the fair value hierarchy.
Contingent Consideration
In connection with some of our acquisitions, we recorded contingent consideration liabilities that can be earned by the sellers upon achievement of certain milestones. The liabilities are measured on a recurring basis and recorded at fair value, using a discounted cash flow analysis or a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, market price of risk adjustment, risk-free rate, and cost of debt, utilizing revenue projections for the respective earn-
6
out period, corresponding targets and approximate timing of payments as outlined in the purchase agreements. The inputs used to calculate the fair value of the contingent consideration liabilities are considered to be Level 3 inputs due to the lack of relevant market activity and significant management judgment. Changes in the fair value of the contingent consideration obligation results from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets. The fair value adjustments are recorded in selling, general, and administrative in the condensed consolidated statements of comprehensive income. As of June 25, 2023, the estimated fair values of contingent consideration payable related to our acquisitions of QuietKat, Stone Glacier, and Fox Racing are $5,769, and $5,920 and $0, respectively. Cash payouts during the quarter related to our Fox Racing and QuietKat liabilities. See Note 4, Acquisitions, for additional information regarding the Fox Racing acquisition.
Contingent consideration liabilities are reported under the following captions in the condensed consolidated balance sheets:
| June 25, 2023 | March 31, 2023 | |||||||||||||
| Other current liabilities | $ | 8,604 | $ | 8,586 | ||||||||||
| Other long-term liabilities | 3,085 | 11,688 | ||||||||||||
| Total | $ | 11,689 | $ | 20,274 | ||||||||||
Following is a summary of our contingent consideration liability Level 3 activity during fiscal year 2023:
| Balance, March 31, 2023 | $ | 20,274 | ||||||
| Payments made | (8,585) | |||||||
| Balance, June 25, 2023 | $ | 11,689 | ||||||
Disclosures about the Fair Value of Financial Instruments
The carrying amount of our receivables, inventory, accounts payable, and accrued liabilities as of June 25, 2023 and March 31, 2023 approximates fair value because of the short maturity of these instruments. The carrying values of cash and cash equivalents as of June 25, 2023 and March 31, 2023 are categorized within Level 1 of the fair value hierarchy.
The table below discloses information about carrying values and estimated fair value relating to our financial assets and liabilities:
| June 25, 2023 | March 31, 2023 | |||||||||||||||||||||||||
| Carrying amount | Fair value | Carrying amount | Fair value | |||||||||||||||||||||||
| Fixed-rate debt (1) | $ | 500,000 | $ | 410,000 | $ | 500,000 | $ | 404,000 | ||||||||||||||||||
| Variable-rate debt (2) | 494,910 | 494,910 | 560,000 | 560,000 | ||||||||||||||||||||||
(1) Fixed rate debt —In fiscal year 2021, we issued $500,000 aggregate principal amount of 4.5% Senior Notes which will mature on March 15, 2029. These notes are unsecured and senior obligations. The fair value of the fixed-rate debt is based on market quotes for each issuance. We consider these to be Level 2 instruments. See Note 12, Long-term Debt, for additional information on long-term debt, including certain risks and uncertainties.
(2) Variable rate debt— The carrying value of the amounts outstanding under our 2022 ABL Revolving Credit Facility and 2022 Term Loan approximates the fair value because the interest rates are variable and reflective of market rates as of June 25, 2023. The fair value of this debt is categorized within Level 2 of the fair value hierarchy based on the observable market borrowing rates. See Note 12, Long-term Debt, for additional information on our credit facilities, including certain risks and uncertainties.
We measure certain nonfinancial assets at fair value on a nonrecurring basis if certain indicators are present. These assets include long-lived assets that are written down to fair value when they are held for sale or determined to be impaired.
7
3. Leases
We lease certain warehouse and distribution space, manufacturing space, office space, retail locations, equipment, and vehicles. All of these leases are classified as operating leases. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. These rates are assessed on a quarterly basis. The operating lease assets also include any lease payments made less lease incentives. Leases with an initial term of twelve months or less are not recorded on the balance sheet. For operating leases, expense is recognized on a straight-line basis over the lease term. Variable lease payments associated with our leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are assessed. Tenant improvement allowances are recorded as leasehold improvements with an offsetting adjustment included in our calculation of its right-of-use asset.
Many leases include one or more options to renew, with renewal terms that can extend the lease term up to five years. The exercise of lease renewal options is at our sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
The amounts of assets and liabilities related to our operating leases were as follows:
| Balance Sheet Caption | June 25, 2023 | March 31, 2023 | ||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Operating lease assets | Operating lease assets | $ | 107,318 | $ | 106,828 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Current: | ||||||||||||||||||||
| Operating lease liabilities | $ | 15,898 | $ | 16,351 | ||||||||||||||||
| Long-term: | ||||||||||||||||||||
| Operating lease liabilities | Long-term operating lease liabilities | 103,820 | 103,313 | |||||||||||||||||
| Total lease liabilities | $ | 119,718 | $ | 119,664 | ||||||||||||||||
The components of lease expense are recorded to cost of sales and selling, general, and administrative expenses in the condensed consolidated statements of comprehensive income. The components of lease expense were as follows:
| Three months ended | ||||||||||||||
| June 25, 2023 | June 26, 2022 | |||||||||||||
Fixed operating lease costs (1) | $ | 7,101 | $ | 5,805 | ||||||||||
| Variable operating lease costs | 1,210 | 463 | ||||||||||||
| Operating and sub-lease income | (192) | (151) | ||||||||||||
| Net Lease costs | $ | 8,119 | $ | 6,117 | ||||||||||
(1) Includes short-term leases, which are immaterial.
The weighted average remaining lease term and weighted average discount rate is as follows:
| June 25, 2023 | March 31, 2023 | |||||||||||||
| Weighted Average Remaining Lease Term (Years): | ||||||||||||||
| Operating leases | 9.60 | 9.71 | ||||||||||||
| Weighted Average Discount Rate: | ||||||||||||||
| Operating leases | 8.40 | % | 8.43 | % | ||||||||||
8
The approximate minimum lease payments under non-cancelable operating leases as of June 25, 2023 are as follows:
| Remainder of fiscal year 2024 | $ | 19,525 | ||||||
| Fiscal year 2025 | 20,407 | |||||||
| Fiscal year 2026 | 18,505 | |||||||
| Fiscal year 2027 | 16,997 | |||||||
| Fiscal year 2028 | 15,770 | |||||||
| Thereafter | 88,666 | |||||||
| Total lease payments | 179,870 | |||||||
| Less imputed interest | (60,152) | |||||||
| Present value of lease liabilities | $ | 119,718 | ||||||
Supplemental cash flow information related to leases is as follows:
| Three months ended | ||||||||||||||
| June 25, 2023 | June 26, 2022 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows - operating leases | $ | 6,707 | $ | 4,782 | ||||||||||
| Operating lease assets obtained in exchange for lease liabilities: | ||||||||||||||
| Operating leases | 2,370 | 432 | ||||||||||||
4. Acquisitions
During the second quarter of fiscal year 2023, we acquired Simms Fishing Products (Simms), a premium fishing brand and leading manufacturer of waders, outerwear, footwear and technical apparel. We finalized the purchase price allocation during the fourth quarter of fiscal year 2023, and no significant changes were recorded from the original estimation. The results of this business are reported within the Outdoor Recreation operating segment and the Outdoor Products reportable segment.
During the second quarter of fiscal year 2023, we acquired Fox (Parent) Holdings, Inc. (“Fox Racing”), a leader in motocross industry and a growing brand in the mountain bike category. We finalized the purchase price allocation during the fourth quarter of fiscal year 2023, and no significant changes were recorded from the original estimation. The results of this business are reported within the Sports Protection operating segment and the Outdoor Products reportable segment.
5. Derivative Financial Instruments
Commodity Price Risk
We use designated cash flow hedges to hedge our exposure to price fluctuations on lead we purchase for raw material components in our ammunition manufacturing process that are designated and qualify as effective cash flow hedges. The effectiveness of cash flow hedge contracts is assessed quantitatively at inception and qualitatively thereafter considering the transactions critical terms and counterparty credit quality.
The gains and losses on these hedges are included in accumulated other comprehensive loss and are reclassified into earnings at the time the forecasted revenue or expense is recognized. The gains or losses on the lead forward contracts are recorded in inventory as the commodities are purchased and in cost of sales when the related inventory is sold. As of June 25, 2023, we had outstanding lead forward contracts on approximately 4.3 million pounds of lead. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the related change in fair value of the derivative instrument would be reclassified from accumulated other comprehensive loss and recognized in earnings. The asset related to the lead forward contracts is immaterial and is recorded as part of other current assets.
Foreign Exchange Risk
In the normal course of business, we are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of our international subsidiaries. We use designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts as part of our strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates and to mitigate the impact of foreign currency translation on transactions that are denominated primarily in British Pounds, Euros, and Canadian Dollars.
9
Cash Flow Hedging Instrument
We use foreign currency forward contracts designated as qualifying cash flow hedging instruments to help mitigate our exposure on our foreign subsidiaries' inventory purchases and intercompany transactions, which is different than their functional currency. Certain U.S. subsidiaries also hedge a portion of their future sales in Canadian Dollars. These contracts generally mature within 12 months to 15 months from their inception. As of June 25, 2023, the notional amounts of our foreign currency forward contracts designated as cash flow hedge instruments were approximately $29,641. The effectiveness of cash flow hedge contracts is assessed quantitatively at inception and qualitatively thereafter considering the transactions critical terms and counterparty credit quality.
As of June 25, 2023, net losses of $2,276 have been recorded in accumulated other comprehensive loss related to our foreign currency forward contracts. Of this amount, during the three months ended June 25, 2023, net losses of $400 and $679, were reclassified from accumulated other comprehensive loss and recognized in cost of sales and other income, respectively. Unrealized net gains of $918 and $0 were recorded for the three months ended June 25, 2023 and June 26, 2022, respectively. All unrealized gains and losses as of June 25, 2023 will be reclassified into earnings from other comprehensive income within the next twelve months at their then-current value. The net liability fair value related to the foreign forward contracts as of June 25, 2023 and March 31, 2023 of $2,449 and $3,252 is recorded as part of other current liabilities, respectively.
Foreign Currency Forward Contracts Not Designated as Hedging Instruments
We have also used non-designated hedges to hedge a portion of U.S. subsidiary sales that are recorded in Canadian Dollars. These contracts generally mature within 12 months from inception. As of June 25, 2023, the notional amounts of our foreign currency forward contracts not designated as cash flow hedge instruments were approximately $531.
Net loss related to these foreign contracts of $15 and $0 for the three months ended June 25, 2023 and June 26, 2022, respectively, were recognized in the condensed consolidated statement of comprehensive income, as part of . As of June 25, 2023, the fair value of the foreign exchange forward contracts is immaterial and is recorded as part of other current assets. In addition, during the three months ended June 25, 2023 and June 26, 2022,we recorded net foreign currency translation gains of $239 and $0, respectively.
See Note 12, Long-term Debt, for additional information on our interest rate swap contracts.
6. Revenue Recognition
The following tables disaggregate our net sales by major product category:
| Three months ended | ||||||||||||||||||||||||||||||||||||||
| June 25, 2023 | June 26, 2022 | |||||||||||||||||||||||||||||||||||||
| Sporting Products | Outdoor Products | Total | Sporting Products | Outdoor Products | Total | |||||||||||||||||||||||||||||||||
| Sporting Products (1) | $ | 376,593 | $ | — | $ | 376,593 | $ | 510,626 | $ | — | $ | 510,626 | ||||||||||||||||||||||||||
| Outdoor Accessories (2) | — | 53,356 | 53,356 | — | 71,196 | 71,196 | ||||||||||||||||||||||||||||||||
| Action Sports (3) | — | 116,394 | 116,394 | — | 90,058 | 90,058 | ||||||||||||||||||||||||||||||||
| Outdoor Recreation (4) | — | 146,990 | 146,990 | — | 130,732 | 130,732 | ||||||||||||||||||||||||||||||||
| Total | $ | 376,593 | $ | 316,740 | $ | 693,333 | $ | 510,626 | $ | 291,986 | $ | 802,612 | ||||||||||||||||||||||||||
| Geographic Region: | ||||||||||||||||||||||||||||||||||||||
| United States | $ | 343,774 | $ | 228,728 | $ | 572,502 | $ | 481,078 | $ | 202,456 | $ | 683,534 | ||||||||||||||||||||||||||
| Rest of the World | 32,819 | 88,012 | 120,831 | 29,548 | 89,530 | 119,078 | ||||||||||||||||||||||||||||||||
| Total | $ | 376,593 | $ | 316,740 | $ | 693,333 | $ | 510,626 | $ | 291,986 | $ | 802,612 | ||||||||||||||||||||||||||
(1) Sporting Products includes the Ammunition operating segment.
(2) Outdoor Accessories includes the Outdoor Accessories operating segment.
(3) Action Sports includes the operating segments: Sports Protection and Cycling.
(4) Outdoor Recreation includes the operating segments: Hydration, Outdoor Cooking, Golf, Fishing and our Stone Glacier business.
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We sell our products in the U.S. and internationally. A majority of our sales are concentrated in the U.S. See Note 16, Operating Segment Information for information on international revenues.
For the majority of our contracts with customers, we recognize revenue for our products at a point in time upon the transfer of control of the products to the customer, which typically occurs upon shipment and coincides with our right to payment, the transfer of legal title, and the transfer of the significant risks and rewards of ownership of the product. For our contracts that include bundled and hardware and software sales, revenue related to delivered hardware and bundled software is recognized when control has transferred to the customer, which typically occurs upon shipment. Revenue allocated to unspecified software update rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided.
Typically, our contracts require customers to pay within 30-60 days of product delivery with a discount available to some customers for early payment. In some cases, we offer extended payment terms to customers. However, we do not consider these extended payment terms to be a significant financing component of the contract because the payment terms are less than a year.
In limited circumstances, our contract with a customer may have shipping terms that indicate a transfer of control of the products upon their arrival at the destination rather than upon shipment. In those cases, we recognize revenue only when the product reaches the customer destination, which may require us to estimate the timing of transfer of control based on the expected delivery date. In all cases, however, we consider our costs related to shipping and handling to be a cost of fulfilling the contract with the customer.
The total amount of revenue we recognize for the sale of our products reflects various sales adjustments for discounts, returns, refunds, allowances, rebates, and other customer incentives. These sales adjustments can vary based on market conditions, customer preferences, timing of customer payments, volume of products sold, and timing of new product launches. These adjustments require management to make reasonable estimates of the amount we expect to receive from the customer. We estimate sales adjustments by customer or by product category on the basis of our historical experience with similar contracts with customers, adjusted as necessary to reflect current facts and circumstances and our expectations for the future. Sales taxes, federal excise taxes, and other similar taxes are excluded from revenue.
For the immaterial amount of our contracts that have multiple performance obligations, which represent promises within an arrangement that are distinct, we allocate revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). When available, we use observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect our best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. We allocate revenue and any related discounts to these performance obligations based on their relative SSPs.
Incentives in the form of cash paid to the customer (or a reduction of a customer cash payment to us) typically are recognized as a reduction of sales unless the incentive is for a distinct benefit that we receive from the customer, e.g., advertising or marketing.
We pay commissions to some of our employees based on agreed-upon sales targets. We recognize the incremental costs of obtaining a contract as an expense when incurred because our sales contracts with commissions are a year or less.
7. Earnings Per Share
The computation of basic earnings per share ("EPS") is based on the weighted average number of shares that were outstanding during the period. The computation of diluted EPS is based on the number of basic weighted average shares outstanding plus the number of common shares that would be issued assuming the exercise of all potentially dilutive common shares, such as common stock to be issued upon exercise of options, contingently issuable shares and restricted stock units, using the treasury stock method.
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In computing EPS for the periods presented, earnings, as reported for each respective period, is divided by the number of shares below:
| Three months ended | ||||||||||||||
| (Amounts in thousands except per share data) | June 25, 2023 | June 26, 2022 | ||||||||||||
| Numerator: | ||||||||||||||
| Net income | $ | 58,100 | $ | 126,015 | ||||||||||
| Denominator: | ||||||||||||||
| Weighted-average number of common shares outstanding basic: | 57,455 | 56,486 | ||||||||||||
| Dilutive effect of share-based awards (1) | 1,086 | 1,895 | ||||||||||||
| Diluted shares | 58,541 | 58,381 | ||||||||||||
| Earnings per common share: | ||||||||||||||
| Basic | $ | 1.01 | $ | 2.23 | ||||||||||
| Diluted | $ | 0.99 | $ | 2.16 | ||||||||||
(1) Potentially dilutive securities, which were not included in the computation of diluted earnings per share, because either the effect would have been anti-dilutive, or the options’ exercise prices were greater than the average market price of the common stock were 109 for the three months ended June 25, 2023 and 3 for the three months ended June 26, 2022.
8. Receivables
Our trade accounts receivables are recorded at net realizable value, which includes an appropriate allowance for estimated credit losses. We maintain an allowance for credit losses related to accounts receivable for future expected credit losses resulting from the inability or unwillingness of our customers to make required payments. We estimate the allowance based upon historical bad debts, current customer receivable balances, age of customer receivable balances and the customers' financial condition, and in relation to a representative pool of assets consisting of a large number of customers with similar risk characteristics. The allowance is adjusted as appropriate to reflect differences in current conditions as well as changes in forecasted macroeconomic conditions. Receivables that do not share risk characteristics are evaluated on an individual basis, including those associated with customers that have a higher probability of default.
Net receivables are summarized as follows:
| June 25, 2023 | March 31, 2023 | |||||||||||||
| Trade receivables | $ | 397,979 | $ | 349,424 | ||||||||||
| Other receivables | 13,730 | 8,899 | ||||||||||||
| Less: allowance for estimated credit losses and discounts | (20,245) | (18,950) | ||||||||||||
| Net receivables | $ | 391,464 | $ | 339,373 | ||||||||||
Walmart represented 15% and 10% of our total trade receivables balance as of June 25, 2023 and March 31, 2023, respectively.
The following provides a reconciliation of the activity related to the allowance for estimated credit losses for the quarter ended June 25, 2023:
| Balance, March 31, 2023 | $ | 18,950 | ||||||
| Provision for credit losses | 1,421 | |||||||
| Write-off of uncollectible amounts, net of recoveries | (126) | |||||||
| Balance, June 25, 2023 | $ | 20,245 | ||||||
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9. Inventories
Current net inventories consist of the following:
| June 25, 2023 | March 31, 2023 | |||||||||||||
| Raw materials | $ | 207,007 | $ | 199,225 | ||||||||||
| Work in process | 63,721 | 63,652 | ||||||||||||
| Finished goods | 439,292 | 447,020 | ||||||||||||
| Net inventories | $ | 710,020 | $ | 709,897 | ||||||||||
We consider inventories to be long-term if they are not expected to be sold within one year. Long-term inventories are presented on the balance sheet net of reserves within deferred charges and other non-current assets and totaled $51,919 and $45,929 as of June 25, 2023 and March 31, 2023, respectively.
10. Accumulated Other Comprehensive Loss (AOCL)
The components of AOCL, net of income taxes, are as follows:
| June 25, 2023 | March 31, 2023 | |||||||||||||
| Derivatives | $ | (1,969) | $ | (3,543) | ||||||||||
| Pension and other postretirement benefits liabilities | (70,887) | (71,449) | ||||||||||||
| Cumulative translation adjustment | (5,146) | (5,810) | ||||||||||||
Total AOCL | $ | (78,002) | $ | (80,802) | ||||||||||
The following tables detail the amounts reclassified from AOCL to earnings as well as the changes in derivatives, pension and other postretirement benefits, and foreign currency translation, net of income tax:
| Three months ended June 25, 2023 | ||||||||||||||||||||||||||
| Derivatives | Pension and other postretirement benefits liabilities | Cumulative translation adjustment | Total | |||||||||||||||||||||||
| Beginning balance in AOCL | $ | (3,543) | $ | (71,449) | $ | (5,810) | $ | (80,802) | ||||||||||||||||||
| Change in fair value of derivatives | 763 | — | — | 763 | ||||||||||||||||||||||
| Net losses reclassified from AOCL | 811 | — | — | 811 | ||||||||||||||||||||||
| Net actuarial losses reclassified from AOCL (1) | — | 562 | — | 562 | ||||||||||||||||||||||
| Net change in cumulative translation adjustment | — | — | 664 | 664 | ||||||||||||||||||||||
| Ending balance in AOCL | $ | (1,969) | $ | (70,887) | $ | (5,146) | $ | (78,002) | ||||||||||||||||||
(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.
| Three months ended June 26, 2022 | ||||||||||||||||||||||||||
| Derivatives | Pension and other postretirement benefits liabilities | Cumulative translation adjustment | Total | |||||||||||||||||||||||
| Beginning balance in AOCL | $ | (356) | $ | (71,075) | $ | (5,248) | $ | (76,679) | ||||||||||||||||||
| Change in fair value of derivatives | 75 | — | — | 75 | ||||||||||||||||||||||
| Net (gains) reclassified from AOCL | (66) | — | — | (66) | ||||||||||||||||||||||
| Net actuarial losses reclassified from AOCL (1) | — | 694 | — | 694 | ||||||||||||||||||||||
| Net change in cumulative translation adjustment | — | — | (473) | (473) | ||||||||||||||||||||||
| Ending balance in AOCL | $ | (347) | $ | (70,381) | $ | (5,721) | $ | (76,449) | ||||||||||||||||||
(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. See Note 13, Employee Benefit Plans.
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11. Goodwill and Intangible Assets
The carrying value of goodwill by reportable segment was as follows:
| Sporting Products | Outdoor Products | Total | ||||||||||||||||||
| Balance, March 31, 2023 | $ | 86,105 | $ | 379,604 | $ | 465,709 | ||||||||||||||
| Balance, June 25, 2023 | $ | 86,105 | $ | 379,604 | $ | 465,709 | ||||||||||||||
Intangible assets by major asset class consisted of the following:
| June 25, 2023 | March 31, 2023 | |||||||||||||||||||||||||||||||||||||
| Gross carrying amount | Accumulated amortization | Total | Gross carrying amount | Accumulated amortization | Total | |||||||||||||||||||||||||||||||||
| Trade names | $ | 113,915 | $ | (32,622) | $ | 81,293 | $ | 113,915 | $ | (30,848) | $ | 83,067 | ||||||||||||||||||||||||||
| Patented technology | 36,854 | (17,047) | 19,807 | 36,854 | (16,313) | 20,541 | ||||||||||||||||||||||||||||||||
| Customer relationships and other | 530,402 | (161,577) | 368,825 | 530,237 | (151,272) | 378,965 | ||||||||||||||||||||||||||||||||
Total | 681,171 | (211,246) | 469,925 | 681,006 | (198,433) | 482,573 | ||||||||||||||||||||||||||||||||
| Non-amortizing trade names | 250,603 | — | 250,603 | 250,603 | — | 250,603 | ||||||||||||||||||||||||||||||||
Net intangible assets | $ | 931,774 | $ | (211,246) | $ | 720,528 | $ | 931,609 | $ | (198,433) | $ | 733,176 | ||||||||||||||||||||||||||
The net increase in gross intangible assets during the first quarter of fiscal year 2024 was due to the impact of foreign exchange rates. Amortization expense was $12,707 and $8,036 for the three months ended June 25, 2023 and June 26, 2022, respectively.
As of June 25, 2023, we expect amortization expense related to these assets to be as follows:
| Remainder of fiscal year 2024 | $ | 37,953 | ||||||
| Fiscal year 2025 | 50,586 | |||||||
| Fiscal year 2026 | 47,577 | |||||||
| Fiscal year 2027 | 46,127 | |||||||
| Fiscal year 2028 | 40,957 | |||||||
| Thereafter | 246,725 | |||||||
| Total | $ | 469,925 | ||||||
12. Long-term Debt
| Long-term debt consisted of the following: | June 25, 2023 | March 31, 2023 | ||||||||||||
| 2022 ABL Revolving Credit Facility | $ | 290,000 | $ | 355,000 | ||||||||||
| 2022 Term Loan | 204,910 | 205,000 | ||||||||||||
| Total Principal Amount of Credit Agreements | 494,910 | 560,000 | ||||||||||||
4.5% Senior Notes | 500,000 | 500,000 | ||||||||||||
| Total Principal Amount of Long-Term Debt | 994,910 | 1,060,000 | ||||||||||||
| Less: unamortized deferred financing costs related to term loans | (8,905) | (10,342) | ||||||||||||
| Carrying amount of long-term debt | 986,005 | 1,049,658 | ||||||||||||
| Less: current portion | (100,000) | (65,000) | ||||||||||||
| Carrying amount of long-term debt, excluding current portion | $ | 886,005 | $ | 984,658 | ||||||||||
Credit Agreements—On August 5, 2022, we refinanced our 2021 ABL Revolving Credit Facility by entering into the 2022 ABL Revolving Credit Facility, which provides for a $600,000 senior secured asset-based revolving credit facility. The amount available under the 2022 ABL Revolving Credit Facility is the lesser of the total commitment of $600,000 or a borrowing base based on percentages of eligible receivables, inventory, and cash, minus certain reserves, but, in each case, subject to the excess availability financial covenant under the 2022 ABL Revolving Credit Facility described below. As of
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June 25, 2023, the Excess Availability, or the amount available to borrow under the 2022 ABL Revolving Credit Facility, based on the borrowing base less outstanding borrowings of $290,000 and outstanding letters of credit of $14,878, less the minimum required borrowing base of $57,000, was $199,981. The 2022 ABL Revolving Credit Facility matures on March 31, 2026 (the “Maturity Date”), subject to a customary springing maturity in respect of the 4.5% Notes due 2029 (described below) and the 2022 Term Loan (described below). Any outstanding revolving loans under the 2022 ABL Revolving Credit Facility will be payable in full on the Maturity Date.
Concurrently with the effectiveness of the 2022 ABL Revolving Credit Facility, we also obtained a $350,000 senior secured asset-based term loan facility (the “2022 Term Loan”). The 2022 Term Loan matures on August 5, 2024 (the "Term Maturity Date") and is subject to quarterly principal payments on the last business day of each quarter in an amount equal to (i) 12.5% of the original principal amount of the 2022 Term Loan if the aggregate outstanding principal balance of the 2022 Term Loan exceeds the Term Loan Formula Threshold described below, or (ii) 10.0% of the original principal amount of the 2022 Term Loan if the aggregate outstanding principal balance of the 2022 Term Loan is equal to or less than the Term Loan Formula Threshold described below. As of June 25, 2023, our quarterly principal payments are equal to 10.0% of the original principal amount of the 2022 Term Loan. The 2022 Term Loan is also subject to certain mandatory prepayment requirements, including with respect to the net cash proceeds from the sale of certain collateral, subject to our rights to reinvest such proceeds, and a percentage of our excess cash flow, to be calculated annually. The Term Loan Formula Threshold is based on a percentage of the appraisal value of eligible intellectual property, eligible machinery and equipment, and the fair market value of eligible real property minus certain reserves. Any outstanding term loans under the 2022 Term Loan will be payable in full on the Term Maturity Date.
Borrowings under the 2022 ABL Revolving Credit Facility bear interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.25% to 0.75% or the sum of a Term Secured Overnight Financing Rate ("Term SOFR") plus a credit spread adjustment of 0.10%, plus a margin ranging from 1.25% to 1.75%. The margins vary based on our Average Excess Availability under the 2022 ABL Revolving Credit Facility. As of June 25, 2023, the margin under the 2022 ABL Revolving Credit Facility was 0.75% for base rate loans and 1.75% for Term SOFR loans. We pay a commitment fee on the unused commitments under the 2022 ABL Revolving Credit Facility of 0.175% per annum.
Borrowings under the 2022 Term Loan bear interest at a rate equal to either the sum of a base rate plus a margin ranging from 2.50% to 3.00% or the sum of Term SOFR plus a credit spread adjustment of 0.10%, plus a margin ranging from 3.50% to 4.00%. The margins vary based on our Term Loan Formula Threshold under the 2022 Term Loan. As of June 25, 2023, the margin under the 2022 Term Loan was 2.50% for base rate loans and 3.50% for Term SOFR loans.
As of June 25, 2023, the weighted average interest rate for our borrowings under the 2022 ABL Revolving Credit Facility and 2022 Term Loan was 7.57%.
We incurred debt issuance costs related to the 2022 ABL Revolving Credit Facility of approximately $6,818. Debt issuance costs of approximately $11,305, including remaining unamortized debt issuance costs related to the 2021 ABL Credit Facility, are included within other current and non-current assets and being amortized over the term of the 2022 ABL Revolving Credit Facility to interest expense.
We incurred debt issuance costs related to the 2022 Term Loan of approximately $10,444. The debt issuance costs associated with the 2022 Term Loan are being amortized to interest expense over 2 years.
Substantially all domestic tangible and intangible assets of Vista Outdoor and our domestic subsidiaries are pledged as collateral under the 2022 ABL Revolving Credit Facility and 2022 Term Loan.
4.5% Notes—In fiscal year 2021, we issued $500,000 aggregate principal amount of 4.5% Notes that mature on March 15, 2029. These notes are unsecured and senior obligations. Interest on the notes is payable semi-annually in arrears on March 15 and September 15 of each year. We have the right to redeem some or all of these notes on or after March 15, 2024 at specified redemption prices. Prior to March 15, 2024, 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 March 15, 2024, we may redeem up to 40% of the aggregate principal amount of these notes with the net cash proceeds of certain equity offerings, at a price equal to 104.5% of their principal amount plus accrued and unpaid interest to the date of redemption. Debt issuance costs of approximately $4,491 are being amortized to interest expense over eight years, the term of the notes.
Rank and guarantees—The 2022 ABL Revolving Credit Facility and 2022 Term Loan obligations are guaranteed on a secured basis, jointly and severally and fully and unconditionally by substantially all of our domestic subsidiaries. Vista Outdoor (the parent company issuer) has no independent assets or operations. We own 100% of all of these guarantor subsidiaries. The 4.5% Notes are senior unsecured obligations of Vista Outdoor and will rank equally in right of payment with
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any future senior unsecured indebtedness and senior in right of payment to any future subordinated indebtedness of Vista Outdoor. The 4.5% Notes are fully and unconditionally guaranteed, jointly and severally, by our existing and future domestic subsidiaries that guarantee indebtedness under our 2022 ABL Revolving Credit Facility and 2022 Term Loan or that incur or guarantee certain of our other indebtedness, or indebtedness of any subsidiary guarantor, in an aggregate principal amount in excess of $75,000. These guarantees are senior unsecured obligations of the applicable subsidiary guarantors. The guarantee by any subsidiary guarantor of our obligations in respect of the 4.5% 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 4.5% Notes, or
•if such subsidiary guarantor has been released from its guarantees of indebtedness under the 2022 ABL Revolving Credit Facility and 2022 Term Loan and all capital markets debt securities
Interest Rate swaps
During fiscal year 2023, we entered into floating-to-fixed interest rate swaps in order to mitigate the risk of changes in our interest rates on our outstanding variable-rate debt. We will receive variable interest payments from the counterparty lenders in exchange for fixed interest rate payments made by us. As of June 25, 2023, we had the following interest rate swaps outstanding:
| @ | Notional | Fair Value | Pay Fixed | Receive Floating | Maturity Date | |||||||||||||||||||||||||||
| Non-amortizing swap | $ | 50,000 | $ | (297) | 4.910% | 4.847% | Feb 2026 | |||||||||||||||||||||||||
| Non-amortizing swap | 25,000 | (266) | 4.650% | 4.698% | Mar 2026 | |||||||||||||||||||||||||||
The amount paid or received under these swaps is recorded as an adjustment to interest expense. As of June 25, 2023, losses of $563 were recorded in accumulated other comprehensive loss related to interest rate swaps. During the three months ended June 25, 2023, we recognized net gains of $74 in interest expense related to the interest rate swap contract. All unrealized gains and losses as shown as of June 25, 2023 will be recognized in the condensed consolidated statements of comprehensive income in interest expense within the next two fiscal years, at their then-current value. The liability related to the interest rate swaps is recorded as part of other long-term liabilities.
Covenants
2022 ABL Revolving Credit Facility—Our 2022 ABL Revolving Credit Facility and 2022 Term Loan impose restrictions on us, including limitations on our ability to pay cash dividends, incur debt or liens, redeem or repurchase Vista Outdoor stock, enter into transactions with affiliates, make investments, merge or consolidate with others or dispose of assets. Each of the 2022 ABL Revolving Credit Facility and 2022 Term Loan contains a financial covenant which requires that Excess Availability under the 2022 ABL Revolving Credit Facility cannot fall below the greater of (a) 10% of the line cap or (b) $57,000. As a result of this financial covenant, we must maintain Excess Availability of at least the greater of 10% of the line cap or $57,000 at all times in order to satisfy the financial covenant. In addition, as long as the 2022 Term Loan remains outstanding, we also must maintain a maximum consolidated leverage ratio (as defined in the credit agreement) of 3.00:1.00 as of the end of each fiscal quarter. As of June 25, 2023, the consolidated leverage ratio was 1.74. Each of the 2022 ABL Revolving Credit Facility and the 2022 Term Loan includes a covenant that prohibits the spin-off of any line of business of Vista Outdoor or certain of its subsidiaries, including the expected separation of our Outdoor Products segment (the “Planned Separation”), and amendment of each such covenant will require the consent of all lenders under the applicable credit facility in order to permit the Planned Separation. Vista Outdoor anticipates that each of the 2022 ABL Revolving Credit Facility and the 2022 Term Loan will be repaid or refinanced in full prior to or upon the consummation of the Planned Separation. If we do not comply with the covenants in the 2022 ABL Revolving Credit Facility or 2022 Term Loan, the lenders under the applicable facility may, subject to customary cure rights, require the immediate payment of all amounts outstanding under such facility. As noted above, the Excess Availability less the minimum required borrowing base under the 2022 ABL Revolving Credit Facility was $199,981 as of June 25, 2023. Vista Outdoor has the option to increase the amount of the 2022 ABL Revolving Credit Facility in an aggregate principal amount not to exceed $150,000, to the extent that any one or more lenders, whether or not currently party to the 2022 ABL Revolving Credit Facility, commits to be a lender for such amount.
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4.5% Notes—The indenture governing the 4.5% 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, make other distributions, repurchase, or redeem our capital stock, prepay, redeem or repurchase certain debt and make loans and investments.
The 2022 ABL Revolving Credit Facility, the 2022 Term Loan, and the indenture governing the 4.5% Notes contain cross-default provisions so that noncompliance with the covenants within one debt agreement could also cause a default under the other debt agreement. As of June 25, 2023, we were in compliance with the covenants of all of our debt agreements. However, we cannot provide assurance that we will be able to comply with such financial covenants in the future due to various risks and uncertainties, some of which may be beyond our control. Any failure to comply with the restrictions in the 2022 ABL Revolving Credit Facility and 2022 Term Loan may prevent us from drawing under these loans and may result in an event of default under the 2022 ABL Revolving Credit Facility and 2022 Term Loan, which default may allow the creditors to accelerate the related indebtedness and the indebtedness under our 4.5% Notes and proceed against the collateral that secures such indebtedness. We may not have sufficient liquidity to repay the indebtedness in such circumstances.
Cash Paid for Interest on Debt
Cash paid for interest on debt, for the three months ended June 25, 2023 and June 26, 2022 totaled $9,814 and $11,800, respectively.
13. Employee Benefit Plans
We recognized an aggregate net loss of $237 and $381 for employee defined benefit plans during the three months ended June 25, 2023 and June 26, 2022, respectively.
Employer contributions and distributions—We made contributions of $0 and $0 to our pension trust during the three months ended June 25, 2023 and June 26, 2022, respectively. No additional contributions are required and we are not expecting to make any contributions to our pension trust for the remainder of fiscal year 2024.
For those same periods, we made no contributions to our other postretirement benefit plans, and we made no distributions to retirees under our non-qualified supplemental executive retirement plan. No additional contributions are required and we are not expecting to make any contributions to our other postretirement benefit plans, or directly to retirees under our non-qualified supplemental executive retirement plans for the remainder of fiscal year 2024.
14. Income Taxes
Our provision for income taxes includes federal, foreign, and state income taxes. Income tax provisions for interim periods are based on the estimated effective annual income tax rates for the current year and the prior year.
The income tax provisions for the three months ended June 25, 2023 and June 26, 2022 represent effective tax rates of 23.0% and 24.1%, respectively. The decrease in the effective tax rate from the prior year three month period is primarily driven by an increase in the research and development tax credit and an increase in the deduction for Foreign Derived Intangible Income (FDII).
The effective tax rate for the three months ended June 25, 2023 and June 26, 2022 is reflective of the federal statutory rate of 21% increased by the state taxes and reserves for uncertain tax positions and partially offset by the deduction for FDII and research and development tax credit.
Income taxes paid, net of refunds, totaled $251 and $509 for the three months ended June 25, 2023 and June 26, 2022, respectively.
We have classified uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year. The amount of unrecognized tax benefits, including interest and penalties, amounted to $30,082 and $28,692 as of June 25, 2023 and March 31, 2023, respectively. Although the timing and outcome of income tax audit settlements are uncertain, it is expected that a $9,804 reduction of the liability for uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $8,891.
15. Contingencies
We lease certain warehouse, distribution and office facilities, vehicles, and office equipment under operating leases. These operating lease liabilities represent commitments for minimum lease payments under non-cancelable operating leases in the amount of $179,870. See Note 3, Leases.
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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 position, 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.
Certain of our former subsidiaries have been identified as a potentially responsible party ("PRPs" or "PRP"), along with other parties, in regulatory agency actions associated with hazardous waste sites. As a PRP, those former subsidiaries may be required to pay a share of the costs of the investigation and clean-up of these sites. In that event, we would be obligated to indemnify those subsidiaries for those costs. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our operating results, financial position, or cash flows. We have recorded a liability for environmental remediation of $700 and $717 as of June 25, 2023 and March 31, 2023, respectively.
We could incur substantial additional costs, including cleanup costs, resource restoration, fines, and penalties or third-party property damage or personal injury claims, as a result of violations or liabilities under environmental laws or non-compliance with environmental permits. While environmental laws and regulations have not had a material adverse effect on our operating results, financial condition, or cash flows in the past, and we have environmental management programs in place to mitigate these risks, it is difficult to predict whether they will have a material impact in the future.
16. Operating Segment Information
As of June 25, 2023, we had eight operating segments, which have been aggregated into two reportable segments, Sporting Products and Outdoor Products. This is consistent with how our chief operating decision maker (CODM), our Chief Executive Officer, allocates resources and makes decisions. Our Ammunition operating segment is in its own reportable segment which has been named Sporting Products. We aggregate our Outdoor Accessories, Sports Protection, Outdoor Cooking, Hydration, Golf, Fishing, and Cycling operating segments into the Outdoor Products reportable segment. The operating segments aggregating into our Outdoor Products reportable segment rely primarily on international suppliers to manufacture the products they sell, which impacts their economic characteristics in a similar manner. These operating segments also share other commonalities or risks, such as technology or intellectual property sharing, common regulated environments, similar input cost risks, and nature of their products. Consumers of the products in these operating segments are typically looking to upgrade or replace their products in a similar time frame.
Our CODM relies on internal management reporting that analyzes our operating segment's operating income. Certain corporate-related costs and other non-recurring costs are not allocated to the segments in order to present comparable results from period to period and are not utilized by management in determining segment profitability.
Our Sporting Products and Outdoor Products reportable segments generated approximately 54% and 46%, respectively, of our external sales in the three months ended June 25, 2023.
No single customer contributed more than 10% of our sales in the three months ended June 25, 2023 and June 26, 2022.
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The following tables contain information utilized by management to evaluate our operating segments for the periods presented:
| Three months ended June 25, 2023 | ||||||||||||||||||||||||||
| Sporting Products | Outdoor Products | (a) Corporate and other reconciling items | Total | |||||||||||||||||||||||
| Sales, net | $ | 376,593 | $ | 316,740 | $ | — | $ | 693,333 | ||||||||||||||||||
| Gross profit | 131,903 | 94,854 | — | 226,757 | ||||||||||||||||||||||
| Operating income | $ | 108,464 | $ | 6,524 | $ | (22,802) | $ | 92,186 | ||||||||||||||||||
| Other expense, net | (541) | |||||||||||||||||||||||||
| Interest expense, net | (16,218) | |||||||||||||||||||||||||
| Income before income taxes | $ | 75,427 | ||||||||||||||||||||||||
| Depreciation and amortization | $ | 6,399 | $ | 17,578 | $ | 950 | $ | 24,927 | ||||||||||||||||||
Three months ended June 26, 2022 | ||||||||||||||||||||||||||
| Sporting Products | Outdoor Products | (a) Corporate and other reconciling items | Total | |||||||||||||||||||||||
| Sales, net | $ | 510,626 | $ | 291,986 | $ | — | $ | 802,612 | ||||||||||||||||||
| Gross Profit | 200,962 | 92,508 | — | 293,470 | ||||||||||||||||||||||
| Operating income | $ | 176,086 | $ | 27,686 | $ | (31,347) | $ | 172,425 | ||||||||||||||||||
| Interest expense, net | (6,310) | |||||||||||||||||||||||||
| Income before income taxes | $ | 166,115 | ||||||||||||||||||||||||
| Depreciation and amortization | $ | 6,382 | $ | 11,807 | $ | 1,127 | $ | 19,316 | ||||||||||||||||||
(a) Reconciling items for the three months ended June 25, 2023 included post-acquisition compensation expense of $1,405. Reconciling items for the three months ended June 26, 2022 included post-acquisition compensation expense $4,332, and contingent consideration fair value adjustment of $112.
Sales, net, exclude all intercompany sales between Sporting Products and Outdoor Products, which were not material for the three months ended June 25, 2023 and June 26, 2022.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands except per share data and unless otherwise indicated)
Forward-Looking Information is Subject to Risk and Uncertainty
Some of the statements made and information contained in this report, excluding historical information, are "forward-looking statements," including those that discuss, among other things: our plans, objectives, expectations, intentions, strategies, goals, outlook or other non-historical matters; projections with respect to future revenues, income, earnings per share or other financial measures for Vista Outdoor; and the assumptions that underlie these matters. The words "believe," "expect," "anticipate," "intend," "aim," "should" and similar expressions are intended to identify such forward-looking statements. To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995. Numerous risks, uncertainties and other factors could cause our actual results to differ materially from the expectations described in such forward-looking statements, including the following:
•supplier capacity constraints, production or shipping disruptions or quality or price issues affecting our operating costs;
•the supply, availability and costs of raw materials and components;
•increases in commodity, energy, and production costs;
•seasonality and weather conditions;
•our ability to complete acquisitions, realize expected benefits from acquisitions and integrate acquired businesses;
•reductions in or unexpected changes in or our inability to accurately forecast demand for ammunition, accessories, or other outdoor sports and recreation products;
•disruption in the service or significant increase in the cost of our primary delivery and shipping services for our products and components or a significant disruption at shipping ports;
•risks associated with diversification into new international and commercial markets, including regulatory compliance;
•our ability to take advantage of growth opportunities in international and commercial markets;
•our ability to obtain and maintain licenses to third-party technology;
•our ability to attract and retain key personnel;
•disruptions caused by catastrophic events;
•risks associated with our sales to significant retail customers, including unexpected cancellations, delays, and other changes to purchase orders;
•our competitive environment;
•our ability to adapt our products to changes in technology, the marketplace and customer preferences, including our ability to respond to shifting preferences of the end consumer from brick and mortar retail to online retail;
•our ability to maintain and enhance brand recognition and reputation;
•Our association with the firearms industry;
•others' use of social media to disseminate negative commentary about us, our products, and boycotts;
•the outcome of contingencies, including with respect to litigation and other proceedings relating to intellectual property, product liability, warranty liability, personal injury, and environmental remediation;
•our ability to comply with extensive federal, state and international laws, rules and regulations;
•changes in laws, rules and regulations relating to our business, such as federal and state ammunition regulations;
•risks associated with cybersecurity and other industrial and physical security threats;
•interest rate risk;
•changes in the current tariff structures;
•changes in tax rules or pronouncements;
•capital market volatility and the availability of financing;
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•Our debt covenants may limit our ability to complete acquisitions, incur debt, make investments, sell assets, merge or complete other significant transactions;
•foreign currency exchange rates and fluctuations in those rates;
•general economic and business conditions in the United States and our markets outside the United States, including as a result of the war in Ukraine and the imposition of sanctions on Russia, the COVID-19 pandemic or another pandemic, conditions affecting employment levels, consumer confidence and spending, conditions in the retail environment, and other economic conditions affecting demand for our products and the financial health of our customers; and
•risks related to the separation of our Outdoor Products and Sporting Products segments, including that the process of exploring the transaction and potentially completing the transaction could disrupt or adversely affect the consolidated or separate businesses, results of operations and financial condition, that the transaction may not achieve some or all of any anticipated benefits with respect to either business and that the transaction may not be completed in accordance with our expected plans or anticipated timelines, or at all.
You are cautioned not to place undue reliance on any forward-looking statements we make. A more detailed description of risk factors that may affect our operating results can be found in Part 1, Item 1A, Risk Factors, of our Annual Report on Form 10-K for fiscal year 2023 and in the filings we make with Securities and Exchange Commission (the "SEC") from time to time. We undertake no obligation to update any forward-looking statements, except as otherwise required by law.
Business and Products
Vista Outdoor is a leading global designer, manufacturer, and marketer of outdoor recreation and shooting sports products. Our portfolio of 41 brands are well known market leaders in their respective product categories.
We operate through two reportable segments: Sporting Products and Outdoor Products. Information regarding our segments is further discussed below and in Note 16, Operating Segment Information, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details.
Sporting Products
Our Sporting Products reportable segment designs, develops, distributes and manufactures ammunition, primers and components and serves devoted hunters, recreational shooters, federal and local law enforcement agencies and the military. Our Sporting Products reportable segment consists of our Ammunition operating segment, which includes our ammunition-related businesses, including Federal, Remington, CCI, Speer, and HEVI-Shot.
Our Sporting Products segment generated approximately 54% of our external sales for the three months ended June 25, 2023. The product lines within our Sporting Products segment are focused on the following categories:
•Centerfire pistol ammunition for use in handguns for training, target shooting and personal protection;
•Centerfire rifle ammunition for use in rifles for hunting, target shooting, training and personal protection;
•Rimfire ammunition for training and recreational target shooting in rifles and handguns;
•Shotshell ammunition for clay target shooting, waterfowl, and upland game hunting; and
•Ammunition components.
Among these categories, we derive the largest portion of our sales from ammunition, which is a consumable, repeat purchase product.
Outdoor Products
Our Outdoor Products reportable segment designs, develops, distributes and manufactures gear and equipment to a diverse range of outdoor enthusiasts around the world, including hikers, campers, cyclists, off-road riders, skiers, snowboarders, backyard grillers, golfers, anglers and hunters. Our Outdoor Products reportable segment consists of:
•Our Outdoor Accessories operating segment, which includes our Bushnell Optics, Primos, RCBS, BlackHawk!, and Eagle businesses;
•Our Sports Protection operating segment, which includes our Bell, Blackburn, Fox Racing, and Giro businesses;
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•Our Cycling operating segment, which is comprised of our QuietKat business;
•Our Outdoor Cooking operating segment, which includes our Camp Chef and Fiber Energy businesses;
•Our Hydration operating segment, which is comprised of our CamelBak business;
•Our Golf operating segment, which includes our Bushnell Golf and Foresight Sports businesses; and
•Our Fishing operating segment, which is comprised of our Simms Fishing business.
Our Outdoor Products segment generated approximately 46% of our external sales for the three months ended June 25, 2023. The product lines within our Outdoor Products segment are focused on the following categories:
•Archery and hunting accessories, including hunting arrows, game calls, hunting blinds, and decoys;
•Reloading components for individuals who load their own ammunition;
•Optics, including binoculars, riflescopes, game cameras, and telescopes;
•Tactical accessories, including holsters, duty gear, bags and packs;
•Helmets, goggles and accessories for cycling, snow sports, motocross, power sports, and E-bikes;
•Outdoor cooking equipment, including grills, cookware, pellets, and camp stoves;
•Hydration packs, water bottles, drinkware and coolers;
•Golf launch monitors, golf laser rangefinders, golf GPS devices and other golf technology products;
•Fishing waders, sportswear, outerwear, footwear and fishing tools and accessories, and;
•Ultralightweight, performance hunting gear designed for backcountry use.
Planned Separation of Outdoor Products and Sporting Products
On May 5, 2022, we announced that our Board of Directors unanimously approved preparations for the separation of our Outdoor Products and Sporting Products reportable segments into two independent, publicly-traded companies (the “Planned Separation”). We anticipate that the transaction will be in the form of a distribution to our shareholders of 100% of the stock of Outdoor Products, which will become a new, independent publicly traded company. The distribution is intended to be tax-free to U.S. shareholders for U.S. federal income tax purposes. We currently expect to be ready to complete the transaction in calendar year 2023, subject to final approval by our Board of Directors, a Form 10 registration statement being declared effective by the SEC, regulatory approvals and satisfaction of other conditions. There can be no assurance regarding the ultimate timing of the proposed transaction or that the transaction will be completed.
We expect that the Planned Separation will create a number of benefits for Outdoor Products and Sporting Products, including:
•Enhanced strategic focus with supporting resources: Each company will have enhanced strategic focus with resources to support its specific operational needs and growth drivers.
•Tailored capital allocation priorities: Each company will have a tailored capital allocation philosophy that is better suited to support its distinctive business model and long-term goals.
•Strengthened ability to attract and retain top talent: Each company will benefit from enhanced ability to attract and retain top talent that is ideally suited to execute its strategic and operational objectives.
•Compelling value for shareholders: Each company will present a differentiated and compelling investment opportunity based on its particular business model.
•Expanded strategic opportunities: Improved focus will allow Outdoor Products to further cement its reputation as the acquirer of choice through continued M&A in the outdoor recreation products marketplace and enable Sporting Products to secure attractive partnerships with other manufacturers.
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Financial highlights and notable events for the three months ended June 25, 2023 included the following:
•Net sales decreased $109,279, or 13.6%, over the comparable quarter last year.
◦ Sporting Products net sales decreased $134,033, or 26.2%.
◦ Outdoor Products net sales increased $24,754, or 8.5%.
•Gross profit decreased $66,713, or 22.7%, as compared to the comparable quarter last year. Gross profit margin decreased to 32.7%, a decrease of 390 basis points over the comparable quarter last year.
◦ Sporting Products gross profit decreased $69,059, or 34.4%.
◦ Outdoor Products gross profit increased $2,346, or 2.5%.
•Operating income decreased $80,239, or 46.5%, over the comparable quarter last year. Operating income margin decreased to 13.3%, a decrease of 819 basis points over the comparable quarter last year.
•Net income decreased to $58,100, or $0.99 per diluted share, compared to net income of $126,015, or $2.16 per diluted share, for the comparable quarter last year.
Sporting Products Industry
Sales of hunting and shooting-sports related products, including ammunition, are heavily influenced by hunting and recreational shooting participation rates, personal safety, and the political environment. The Sporting Products segment continues to benefit from positive participation trends. While the market is normalizing off pandemic highs, the industry is healthy driven by this significant increase in baseline participation. Indications are that the 18 million new users who entered the market during the past several years are using our products to practice, compete and hunt. Despite events that drove spikes to June 2022 data, June 2023 NICS checks shows continued strength for the industry with 47 straight months of NICS checks over one million. Also, we continue to see growth in the competitive recreational shooters market. Our multi-brand strategy is a tremendous strength in this market. With a normalizing market in fiscal year 2024, we are expecting a return to seasonal buying patterns driving the consumer purchase cycle. We believe we have a competitive advantage as a house of brands ammunition company and are well positioned to take market share and expand into new markets.
Outdoor Recreation Industry
We believe that long-term outdoor participation trends combined with a larger base of participants supports our expectation of long-term demand for the innovative outdoor recreation-related products produced by our Outdoor Products brands. The Outdoor industry participation base continued to grow this year and is now at a record 168.1 million participants, or over 50% of the US population over the age of six. The surge of participation brought on by the pandemic has stuck, as the new participants continue to be engaged despite the return of pre-pandemic activities and routines. We expect to see a return to organic growth for this segment in the back half of fiscal year 2024 once point of sale and sell-in become more closely aligned. Outdoor Products inventory at retail is improving, depending on the channel or customer as many retailers are still cautious on open-to-buy orders. Our Outdoor Products brands hold a strong competitive position in the marketplace, and we intend to further differentiate our brands through focused research and development, omni-channel strategies and marketing investments including traditional and digital mediums. Following significant investments in our brands’ e-commerce capabilities, both directly and through our E-Commerce Center of Excellence, we believe our brands are well-positioned to benefit from the ongoing shift in consumer shopping behavior to utilize online channels.
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on results of operations, our financial condition, liquidity, and certain other factors that may affect our future results. The following information should be read in conjunction with our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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Current Economic Conditions
Inflation and Consumer Spending
We are exposed to inflationary factors such as increases in labor, supplier, logistics and overhead costs that may adversely affect our operating results. The recent rise in inflation is causing a decline in consumer disposable income, and discretionary spending, which has temporarily impacted the demand in our Outdoor Products brands. Inflation has also contributed to the cost of our products and operating costs. The change in consumer discretionary spending has also had an impact on retailer inventory levels, even though we have seen some decrease in inventory levels in the first fiscal quarter of 2024. Our sales to retailers and distributors follow the end consumer spending patterns. If these adverse conditions persist or become more severe, this may continue to have an adverse effect on our operating results, if the selling prices of our products are not able to offset these increased costs. We cannot predict the impact of these adverse conditions on our liquidity and financial results.
Commodity Price Risk
We have been impacted by changes in the prices of raw materials used in production as well as changes in oil and energy costs. In particular, recent increases in the cost of raw materials used in propellants, along with the volatility of commodity metals, such as copper, zinc and lead continue impact our Sporting Products Segment. We have a strategic sourcing, pricing and hedging strategy to mitigate risk from commodity price fluctuation. See Note 5, Derivative Financial Instruments, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details. We will continue to evaluate the need for future price changes in light of these trends, our competitive landscape, and our financial results. If our sourcing and pricing strategy is unable to offset impacts of the commodity price fluctuations, our future results from operations and cash flows would be materially impacted.
Results of Operations
Segment results for the three months ended June 25, 2023 compared to the three months ended June 26, 2022
Our net sales, gross profit, gross profit as a percentage of net sales (gross profit margin), operating income, operating income as a percentage of net sales (operating income margin), by reporting segment and by corporate and other, and other expense, interest expense, and tax provision by corporate and other (where applicable) are presented below:
| Three months ended | Change | |||||||||||||||||||||||||
| Net Sales: | June 25, 2023 | June 26, 2022 | Dollars | Percent | ||||||||||||||||||||||
| Sporting Products | $ | 376,593 | $ | 510,626 | $ | (134,033) | (26.2) | % | ||||||||||||||||||
| Outdoor Products | 316,740 | 291,986 | 24,754 | 8.5 | % | |||||||||||||||||||||
| Total | $ | 693,333 | $ | 802,612 | $ | (109,279) | (13.6) | % | ||||||||||||||||||
Sporting Products—The decrease in net sales was a result of lower shipments across nearly all categories, as channel inventory has normalized, and the termination of the Lake City contract at the beginning of the third fiscal quarter in the prior fiscal year.
Outdoor Products— The increase in net sales was driven by acquired businesses, partially offset by declines in organic businesses, primarily caused by lower volume due to high channel inventory.
| Three months ended | Change | |||||||||||||||||||||||||
| Gross Profit: | June 25, 2023 | June 26, 2022 | Dollars | Percent | ||||||||||||||||||||||
| Sporting Products | $ | 131,903 | $ | 200,962 | $ | (69,059) | (34.4) | % | ||||||||||||||||||
| Outdoor Products | 94,854 | 92,508 | 2,346 | 2.5 | % | |||||||||||||||||||||
| Total | $ | 226,757 | $ | 293,470 | $ | (66,713) | (22.7) | % | ||||||||||||||||||
| Gross profit margin | 32.7% | 36.6% | ||||||||||||||||||||||||
Sporting Products—The decrease in gross profit was caused by decreased volume and price. Gross profit margin was 35.0% compared to 39.4% in the prior year quarter.
Outdoor Products—The increase in gross profit was primarily driven by acquisitions, partially offset by decreased volume from organic businesses. Gross profit margin was 29.9% compared to 31.7% in the prior year quarter.
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| Three months ended | Change | |||||||||||||||||||||||||
| Operating income | June 25, 2023 | June 26, 2022 | Dollars | Percent | ||||||||||||||||||||||
| Sporting Products | $ | 108,464 | $ | 176,086 | $ | (67,622) | (38.4) | % | ||||||||||||||||||
| Outdoor Products | 6,524 | 27,686 | (21,162) | (76.4) | % | |||||||||||||||||||||
| Corporate and other | (22,802) | (31,347) | 8,545 | 27.3 | % | |||||||||||||||||||||
| Total | $ | 92,186 | $ | 172,425 | $ | (80,239) | (46.5) | % | ||||||||||||||||||
| Operating income margin | 13.3% | 21.5% | ||||||||||||||||||||||||
Sporting Products—The decrease in operating income was primarily caused by decreased gross profit, partially offset by decreased selling costs. Operating income margin was 28.8% compared to 34.5% in the prior year quarter.
Outdoor Products—The decrease in operating income was primarily caused by increased selling, general, and administrative costs related to acquired businesses, partially offset by increased total gross profit primarily driven by acquisitions and lower selling costs related to organic businesses. Operating income margin was 1.9% compared to 9.5% in the prior year quarter.
Corporate and Other—The increase in operating income was primarily driven by decreased share-based and post- acquisition compensation, planned separation, and transaction costs, partially offset by increased transition costs.
| Three months ended | Change | |||||||||||||||||||||||||
| Other expense, net | June 25, 2023 | June 26, 2022 | Dollars | Percent | ||||||||||||||||||||||
| Other expense, net | $ | 541 | $ | — | $ | 541 | — | % | ||||||||||||||||||
The increase in other expense, net was caused by foreign exchange losses related to our businesses acquired during the second quarter of fiscal year 2023.
| Three months ended | Change | |||||||||||||||||||||||||
Interest expense, net: | June 25, 2023 | June 26, 2022 | Dollars | Percent | ||||||||||||||||||||||
| Corporate and other | $ | 16,218 | $ | 6,310 | $ | 9,908 | 157.0 | % | ||||||||||||||||||
For the three months ended June 25, 2023, the increase in interest expense is due to higher debt and average interest rates, as well as increased amortization of debt issuance cost associated with our debt refinancing.
| Three months ended | ||||||||||||||||||||||||||||||||
| Income tax provision: | June 25, 2023 | Effective Rate | June 26, 2022 | Effective Rate | $ Change | |||||||||||||||||||||||||||
| Corporate and other | $ | 17,327 | 23.0 | % | $ | 40,100 | 24.1 | % | $ | (22,773) | ||||||||||||||||||||||
See Note 14, Income Taxes, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details regarding income taxes.
The decrease in the effective rate for the three months ended June 25, 2023 from the prior year three month period is primarily driven by an increase in the research and development tax credit and an increase in the deduction for Foreign Derived Intangible Income (FDII).
Financial Condition
Cash decreased to $63,163 at June 25, 2023 compared to $86,208 at March 31, 2023. The decrease in cash during the first fiscal quarter of 2023 was primarily related to cash used by financing activities of 89,691, and cash used in investing activities of 7,487, partially offset by cash provided by operating activities of $73,701. We used our cash and cash equivalents as well as cash provided by operating activities to fund our operations, pay down our debt and invest in capital expenditures.
Net accounts receivable increased $52,091 compared to March 31, 2023 primarily resulting from higher sales in the back-half of the quarter, increased sales to our customer base with longer payment terms and lower accounts receivable balances due to accelerated collections at the end of the previous quarter. Net accounts receivable as of June 25, 2023 compared to the prior year quarter decreased $90,356 primarily due to a reduction in sales. Cash used to purchase inventory decreased compared to the prior year period as a result of improvements in our inventory management.
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In addition to our normal operating cash requirements, our principal future cash requirements are to fund capital expenditures, debt repayments, share repurchases, earn-outs related to previous acquisitions, and any strategic acquisitions. Our short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain production facilities and working capital requirements. Our debt service requirements over the next two years consist of required interest payments due under our 4.5% Notes, 2022 Term Loan and 2022 ABL Revolving Credit Facility and principal payments due under the 2022 Term Loan.
Based on our current financial condition, management believes that our cash position, combined with anticipated generation of cash flows and the availability of funding, if needed, under our 2022 ABL Revolving Credit Facility, access to debt and equity markets, as well as other potential sources of funding including additional bank financing, will be adequate to fund future growth, to service our currently anticipated short-term and long-term debt obligations, make capital expenditures, pay earn-outs related to previous acquisitions, and fund the 2022 Share Repurchase Program over the next 12 months. As of June 25, 2023, based on the borrowing base less outstanding borrowings of $290,000, outstanding letters of credit of $14,878, less the minimum required borrowing base of $57,000, the amount available under the 2022 ABL Revolving Credit Facility was $199,981. Our total debt as a percentage of total capitalization (total debt and stockholders' equity) was 45.7% as of June 25, 2023. See Note 12, Long-term Debt, for additional discussion of our indebtedness.
There can be no assurance that the cost or availability of future borrowings, if any, will not be materially impacted by capital and credit market conditions, including any disruptions to these markets, as a result of natural disasters and public health crises or other significant catastrophic events, or our future financial condition and performance. Furthermore, because our 2022 ABL Revolving Credit Facility is secured in large part by receivables from our customers, a sustained deterioration in general economic conditions that adversely affects the creditworthiness of our customers could have a negative effect on our future available liquidity under the 2022 ABL Revolving Credit Facility.
Contractual Obligations and Commitments
We lease certain warehouse, distribution and office facilities, vehicles and office equipment under operating leases. As of June 25, 2023, current and long-term operating lease liabilities of $15,898 and $103,820, respectively, were recorded in the accompanying condensed consolidated balance sheets. For further discussion on minimum lease payment obligations, see Note 3, Leases, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details.
Except as discussed in Note 12, Long-term Debt, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and under Liquidity and Capital Resources above, there have been no material changes with respect to the contractual obligations and commitments or off-balance sheet arrangements described in our Annual Report on Form 10-K for fiscal year 2023.
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.
Certain of our former subsidiaries have been identified as PRPs, along with other parties, in regulatory agency actions associated with hazardous waste sites. As a PRP, those former subsidiaries may be required to pay a share of the costs of the investigation and clean-up of these sites. In that event, we would be obligated to indemnify those subsidiaries for such costs. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we do not currently expect that these potential liabilities, individually or in the aggregate, will have a material adverse effect on our operating results, financial condition, or cash flows.
We could incur substantial additional costs, including cleanup costs, resource restoration, fines, and penalties or third-party property damage or personal injury claims, as a result of violations or liabilities under environmental laws or non-compliance with environmental permits. While environmental laws and regulations have not had a material adverse effect on
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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.
See Note 15, Contingencies, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for fiscal year 2023.
Dependence on Key Customers; Concentration of Credit
No single customer contributed 10% or more of our sales in the quarter ended June 25, 2023 and June 26, 2022. If a key customer fails to meet payment obligations, our operating results and financial condition could be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II included in our Annual Report on Form 10-K for fiscal year 2023. Our exposure to market risk has not changed materially since March 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of June 25, 2023, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) and have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended September 25, 2022, we completed the acquisition of Fox Racing. Prior to the acquisition, Fox Racing was a privately-held company and was not subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, or other corporate governance requirements applicable to public reporting companies. As part of our ongoing integration activities, we are continuing to incorporate our controls and procedures into Fox Racing and to augment our company-wide controls to reflect the risks that may be inherent in acquisitions of privately-held companies of this magnitude.
During the quarter ended June 25, 2023, there were no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. 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. 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.
Certain of our former subsidiaries have been identified as PRPs, along with other parties, in regulatory agency actions associated with hazardous waste sites. As a PRP, those former subsidiaries may be required to pay a share of the costs of the investigation and clean-up of these sites. In that event, we would be obligated to indemnify those subsidiaries for those costs. While uncertainties exist with respect to the amounts and timing of our 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.
ITEM 1A. RISK FACTORS
While we attempt to identify, manage and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 describes the known material risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. There are no material changes from the disclosure provided in the Form 10-K for the fiscal year ended March 31, 2023 with respect to the Risk Factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Regulation S-K, Item 408(a) disclosure: During our last fiscal quarter, no director or officer of the Company has adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities of the Company intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), or any non-Rule 10b5-1 trading arrangement.
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ITEM 6. EXHIBITS
| Exhibit Number | Description of Exhibit (and document from which incorporated by reference, if applicable) | |||||||
| 2.1*+ | ||||||||
2.2*+ | ||||||||
| 2.3*+ | ||||||||
| 2.4*+ | ||||||||
| 3.1* | ||||||||
| 3.2* | ||||||||
| 3.3* | ||||||||
| 4.1* | ||||||||
| 4.2* | ||||||||
| 4.3* | ||||||||
| 4.4* | ||||||||
| 4.5* | ||||||||
| 10.1* | ||||||||
| 10.2* | ||||||||
| 10.3* | ||||||||
| 10.4* | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
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| 32 | ||||||||
| 101 | The following financial statements from Vista Outdoor's Quarterly Report on Form 10-Q for the quarter ended June 25, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Stockholders’ Equity, and (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | |||||||
| 104 | The cover page from Vista Outdoor's Quarterly Report on Form 10-Q for the quarter ended June 25, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL) (included as Exhibit 101). | |||||||
* Incorporated by reference.
+ Schedules to exhibits have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. Vista Outdoor agrees to furnish supplementally a copy of any omitted schedules to the SEC upon its request; provided, however, that we may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any document so furnished.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VISTA OUTDOOR INC. | |||||||||||||||||
| Date: | July 27, 2023 | By: | /s/ Andrew Keegan | ||||||||||||||
| Name: | Andrew Keegan | ||||||||||||||||
| Title: | Vice President and Interim Chief Financial Officer | ||||||||||||||||
| (On behalf of the Registrant and as Principal Financial Officer) | |||||||||||||||||
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