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4-Traders Homepage  >  Equities  >  Nyse  >  Vista Outdoor Inc    VSTO

VISTA OUTDOOR INC (VSTO)
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VISTA OUTDOOR : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/10/2017 | 10:56pm CET
(Dollar amounts in thousands 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" as defined in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
give our current expectations or forecasts of future events. Words such as
"may," "expect," "intend," "estimate," "anticipate," "believe," "project," or
"continue," and similar expressions are used to identify forward-looking
statements. From time to time, we also may provide oral or written
forward-looking statements in other materials released to the public. Any or all
forward-looking statements in this report and in any public statements we make
could be materially different. They can be affected by assumptions used or by
known or unknown risks or uncertainties. Consequently, no forward-looking
statements can be guaranteed. Actual results may vary materially. You are
cautioned not to place undue reliance on any forward-looking statements. You
should also understand that it is not possible to predict or identify all such
factors and should not consider the following list to be a complete statement of
all potential risks and uncertainties. Any change in the following factors may
impact the achievement of results:

• general economic and business conditions in the United States and our

other markets, including employment levels, consumer confidence and

spending, the conditions in the retail environment, and other economic

conditions affecting demand for our products and the financial health of

our customers;

• our ability to attract and retain key personnel and maintain and grow our

       relationships with customers, suppliers and other business partners;


•      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;

• reductions, unexpected changes in or our inability to accurately forecast

demand for ammunition, firearms or other outdoor sports and recreation

products;

• risks associated with our sales to significant customers, including

unexpected cancellations, delays and other changes to purchase orders;

• supplier capacity constraints, production disruptions or quality or price

issues affecting our operating costs;

• our competitive environment;

• risks associated with compliance and diversification into international

and commercial markets;

• the supply, availability and costs of raw materials and components;

• increases in commodity, energy and production costs;

• changes in laws, rules and regulations relating to our business, such as

       federal and state firearms and ammunition regulations;


•      our ability to execute our long-term growth strategy, including our
       ability to complete and realize expected benefits from acquisitions and
       integrate acquired businesses;

• our ability to take advantage of growth opportunities in international and

commercial markets;

• foreign currency exchange rates and fluctuations in those rates;

• the outcome of contingencies, including with respect to litigation and

other proceedings relating to intellectual property, product liability,

warranty liability, personal injury and environmental remediation;

• risks associated with cybersecurity and other industrial and physical

security threats;

• capital market volatility and the availability of financing;

• changes to accounting standards or policies; and

• changes in tax rules or pronouncements.

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This list of factors is not exhaustive, and new factors may emerge or changes to
the foregoing factors may occur that would impact our business. We undertake no
obligation to update any forward-looking statements. A more detailed description
of risk factors can be found in Part 1, Item 1A, Risk Factors, of our Annual
Report on Form 10-K for the fiscal year ended March 31, 2017. Additional
information regarding these factors may be contained in our subsequent filings
with the Securities and Exchange Commission, including Forms 10-Q and 8-K. All
such risk factors are difficult to predict, contain material uncertainties that
may affect actual results, and may be beyond our control.
Executive Summary
We serve the outdoor sports and recreation markets through a diverse portfolio
of over 50 well-recognized brands that provide consumers with a wide range of
performance-driven, high-quality and innovative products, including sporting
ammunition and firearms, outdoor accessories, outdoor cooking solutions, outdoor
sports optics, golf rangefinders, performance eyewear, protection for certain
action sports, hydration products, and stand up paddle boards. We serve a broad
range of end consumers, including outdoor enthusiasts, hunters and recreational
shooters, athletes, as well as law enforcement and military professionals. Our
products are sold through a wide variety of mass, specialty and independent
retailers and distributors, such as AcuSport, Amazon, Bass Pro Shops, Big Rock
Sports, Cabela's, Dick's Sporting Goods, Grofa, Recreational Equipment, Inc.,
Sports South, Sportsman's Warehouse, Target, United Sporting Company, and
Walmart. We also sell certain of our products directly to consumers through the
relevant brand's website. We have a scalable, integrated portfolio of brands
that allows us to leverage our deep customer knowledge, product development and
innovation, supply chain and distribution, and sales and marketing functions
across product categories to better serve our retail partners and end users.
As of July 2, 2017, we operated in two business segments. These operating
segments are defined based on the reporting and review process used by the chief
operating decision maker, Vista Outdoor's Chief Executive Officer. As of July 2,
2017, Vista Outdoor's two operating segments were:
•      Outdoor Products, which generated 51% of our external sales in the quarter

ended July 2, 2017. The Outdoor Products product lines are action sports,

archery/hunting accessories, camping, global eyewear and sport protection

products, golf, hydration products, optics, shooting accessories, tactical

       products and water sports. Action sports includes helmets, goggles, and
       accessories for cycling, snow sports, action sports and powersports.
       Archery/hunting accessories include high-performance hunting arrows, game

calls, hunting blinds, game cameras and waterfowl decoys. Camping products

       include our outdoor cooking solutions. Eyewear and sport protection
       products include safety and protective eyewear, as well as fashion and
       sports eyewear. Golf products include laser rangefinders. Hydration
       products include hydration packs and water bottles. Optics products
       include binoculars, riflescopes and telescopes. Shooting accessories
       products include reloading equipment, clay targets, and premium gun care

products. Tactical products include holsters, duty gear, bags and packs.

Water sports products include stand up paddle boards.

Shooting Sports, which generated 49% of our external sales in the quarter

       ended July 2, 2017. Shooting Sports product lines include centerfire
       ammunition, rimfire ammunition, shotshell ammunition, reloading
       components, and firearms.


Financial Highlights and Notable Events
Certain notable events or activities affecting our fiscal 2018 financial results
included the following:
Financial highlights for the quarter ended July 2, 2017
•      In June 2017, we announced changes to our qualified and non-qualified

defined benefit pension plans. As a result of the changes, we recognized a

one-time gain of $5,783 during the quarter ended July 2, 2017. See Note 11

Employee Benefit Plans for additional information.

• Quarterly sales were $568,749 and $630,269 for the quarters ended July 2,

2017 and July 3, 2016, respectively. The decrease in sales was driven

principally by a decrease of $64,038 in the Shooting Sports segment for

the reasons described below. A challenging retail market drove a decrease

       in organic sales in the Outdoor Products segment that was offset by an
       increase of $21,112 due to the acquisition of Camp Chef.


• Gross profit was $146,558 and $171,377 for the quarters ended July 2, 2017

and July 3, 2016, respectively. Gross profit decreased in the current

quarter for both segments as a result of lower sales volume, additional

       sales incentives and unfavorable mix.


• The current quarter's tax rate of 38.2% was consistent with the tax rate

of 38.2% in the quarter ended July 3, 2016. There was no change in the

rate from the prior year quarter because of nondeductible acquisition

costs in the prior year being offset by lower deductions in the current

       year related to stock based compensation.




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Other notable events in fiscal 2018

• On May 9, 2017, we entered into an agreement to amend the Credit Agreement

(the "Amendment"), which increased our maximum consolidated leverage ratio

(as defined in the Credit Agreement) to 4.75 to 1.00, which will step down

to 4.25 to 1.00 as of March 31, 2019, and to 4.00 to 1.00 as of March 31,

2020, as well as added a maximum senior consolidated leverage ratio (as

defined in the Credit Agreement) of 3.50 to 1.00, which will step down to

3.00 as of March 31, 2019. The Credit Agreement provides that borrowings

shall bear interest at a rate equal to either the sum of a base rate plus a

margin ranging from 0.50% to 1.50%, or the sum of a Eurodollar rate plus a

margin ranging from 1.50% to 2.50%, with either margin varying depending on

our consolidated leverage ratio. Debt issuance costs related to the

Amendment of approximately $1,800 will be amortized over the remaining term

      of the Credit Agreement.


•     In May 2017, we signed a long-term agreement with Orbital ATK for the

supply of ammunition products produced at the Lake City Army Ammunition

Plant through September 2020.


Outlook

Outdoor Recreation Industry

The outdoor recreation industry represents a large and growing focus area of our
business. During the past and current fiscal year, we have seen a challenging
retail environment as evidenced by recent bankruptcies and consolidation of
certain of our customers. This challenging retail environment has been driven by
a shift in consumer preferences to online platforms, as well as other market
pressures that resulted in a deeper discounting of our products. These market
pressures became particularly pronounced during the latter half of the third
fiscal quarter of fiscal 2017. Based on the current economic conditions and the
sluggish retail environment in our market, we expect these conditions to
continue throughout fiscal 2018. Given these market conditions, we are taking
appropriate actions to lower our inventory levels by reducing certain purchases
of sourced products and output of manufactured products across both operating
segments. We believe the fragmented nature of the outdoor recreation industry,
combined with retail and consumer overlap with our existing businesses, present
attractive growth opportunities. We hold a strong competitive position in the
market-place, and we intend to further differentiate our brands through focused
R&D and marketing investments including increased use of social media and
revamping our brand websites as we strive to become our customers' brand of
choice in their respective outdoor recreation activities. Growing market share
will continue to be a focus as we execute our strategy of market segmentation by
brand and channel and we anticipate introducing new products to accomplish this.
We are continuing to expand our e-commerce presence to capitalize on the ongoing
shift by consumers to online shopping and are leveraging the experience from our
recent acquisitions to drive growth across business-to-business, dot com,
dropship, and direct-to-consumer channels.

Shooting Sports Industry

Shooting sports related products currently represent just under half of our
sales. We design, develop, manufacture, and source ammunition, long guns and
related equipment products. Among these categories, we derive the largest
portion of our sales from ammunition, which is a consumable, repeat purchase
product. During late fiscal 2015 and 2016, firearms and ammunition sales
experienced an increase as more individuals entered the market and certain
public and political events provided focus on the industry. During the later
months of fiscal 2017 and continuing into fiscal 2018, we believe the market has
softened due to developments in the political environment. The Shooting Sports
industry historically has been a cyclical business with previous market declines
lasting 12-24 months. Given these market conditions, we are taking actions to
lower our inventory levels by reducing certain purchases of sourced products and
output of manufactured product across both operating segments. We believe we are
well-positioned to succeed in a difficult shooting sports market, given our
scale and global operating platform, which we believe is difficult to replicate
in the highly regulated and capital intensive ammunition manufacturing sector.

Critical Accounting Policies

Our critical accounting policies are described in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, of our
Annual Report on Form 10-K for the fiscal year ended March 31, 2017. We believe
our critical accounting policies are those related to:

• revenue recognition,

• allowance for doubtful accounts,

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• inventories,


• income taxes,


• acquisitions, and

• accounting for goodwill and indefinite lived intangibles.



The accounting policies used in preparing our interim fiscal 2018 consolidated
financial statements are the same as those described in our Annual Report on
Form 10-K.
Results of Operations
The following information should be read in conjunction with our condensed
consolidated financial statements. The key performance indicators that our
management uses in managing the business are sales, gross profit, and cash
flows.

Segment total net sales, cost of sales, and gross profit exclude intersegment sales and profit.

Acquisitions

We had no acquisitions during the quarter ended July 2, 2017 and the following acquisitions during fiscal 2017:

Camp Chef-OnSeptember 1, 2016, we completed the acquisition of privately

owned Logan Outdoor Products, LLC and Peak Trades, LLC ("Camp Chef"), a

leading provider of outdoor cooking solutions. Under the terms of the

transaction, we paid $60,000, subject to customary working capital

adjustments, utilizing cash on hand and borrowings under our existing

       credit facility. An additional $4,000 has been deferred and will be paid
       in equal installments on the first, second and third anniversary of the

closing date and $10,000 will be payable if incremental profitability

growth milestones are met and key members of Camp Chef management continue

       their employment with us. The $10,000 will be expensed over the
       measurement period and paid at each milestone date.


Action Sports-On April 1, 2016, we completed the acquisition of BRG Sports

Inc.'s Action Sports division, operated by Bell Sports Corp. ("Action

Sports"). The acquisition includes brands Bell, Giro, Blackburn, CoPilot,

Krash, and Raskullz. Under the terms of the transaction, we paid $400,000,

       subject to customary working capital adjustments, utilizing cash on hand
       and borrowings under our existing credit facilities, and additional
       contingent consideration payable if incremental profitability growth
       milestones within the Bell Powersports product line are achieved. We
       determined a value of the future contingent consideration as of the

acquisition date of $4,272 utilizing the Black Scholes option pricing

model; the total amount paid may differ from this value. Action Sports

remains headquartered in Scotts Valley, California and operates facilities

in the U.S., Canada, Europe and Asia. The acquisition of Action Sports

added more than 600 employees worldwide.

Sales

Walmart contributed 15% and 14% of our sales in the quarters ended July 2, 2017
and July 3, 2016, respectively. No other single customer contributed 10% or more
of our sales in the quarters ended July 2, 2017 and July 3, 2016.
The following is a summary of each operating segment's sales:
                                            Quarter ended
                      July 2, 2017      July 3, 2016      $ Change     % Change
Outdoor Products     $      289,983$      287,465$   2,518        0.9  %
Shooting Sports             278,766           342,804      (64,038 )    (18.7 )%
Total external sales $      568,749$      630,269$ (61,520 )     (9.8 )%


The total change in net sales was driven by the changes within the operating
segments as described below.
Outdoor Products.  The increase in sales was driven by sales of $21,112 from the
acquisition of Camp Chef partially offset by lower organic sales across most
product lines as a result of a challenging retail environment.
Shooting Sports.  The decrease in sales was driven by lower demand in the market
for firearms and ammunition across all product lines.

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Cost of Sales and Gross Profit

The following is a summary of each operating segment's cost of sales and gross
profit:
                                           Quarter ended
Cost of sales        July 2, 2017      July 3, 2016      $ Change     % Change
Outdoor Products    $      213,473$      206,568$   6,905        3.3  %
Shooting Sports            208,448           251,970      (43,522 )    (17.3 )%
Corporate                      270               354          (84 )    (23.7 )%
Total cost of sales $      422,191$      458,892$ (36,701 )     (8.0 )%


                                          Quarter ended
Gross profit        July 2, 2017      July 3, 2016      $ Change     % Change
Outdoor Products   $      76,510$      80,897$  (4,387 )     (5.4 )%
Shooting Sports           70,318            90,834       (20,516 )    (22.6 )%
Corporate                   (270 )            (354 )          84      (23.7 )%
Total gross profit $     146,558$     171,377$ (24,819 )    (14.5 )%


The overall fluctuation in cost of sales and gross profit was driven by the
changes within the operating segments as described below.
Outdoor Products.  The decrease in gross profit was driven by lower sales and
increased promotional activity across various product lines, partially offset by
the profit impact of $6,519 due to the acquisition of Camp Chef.
Shooting Sports.  The decrease in gross profit was primarily caused by the lower
sales volume described above, additional sales incentive programs, and
unfavorable changes in product mix in the current year.
Corporate.  The change in corporate gross profit was not material.
Operating Expenses
                                                                      Quarter ended
                                                             As a %                         As a %
                                           July 2, 2017     of Sales      July 3, 2016     of Sales     $ Change
Research and development                 $        7,791         1.4 %   $        7,831         1.2 %   $    (40 )
Selling, general, and administrative             99,426        17.5 %          104,444        16.6 %     (5,018 )
Total operating expenses                 $      107,217        18.9 %   $      112,275        17.8 %   $ (5,058 )


Operating expenses decreased $5,058 from the prior-year period primarily due to
lower selling, general, and administrative expenses driven by the favorable
impact of the pension curtailment in the quarter ended July 2, 2017 as described
further in Note 11 Employee Benefit Plans.
Net Interest Expense
                                       Quarter ended
                  July 2, 2017      July 3, 2016      $ Change    % Change

Interest Expense $ 12,393$ 11,963$ 430 3.6 %

The increase was due to our debt balances being higher than the prior year period as well as a higher average interest rate on debt, partially offset by the absence of the write-off of deferred financing fees.

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Income Tax Provision
                                          Quarter ended
                               Effective                      Effective
              July 2, 2017        Rate       July 3, 2016        Rate       $ Change
Income taxes $       10,296        38.2 %   $       18,015        38.2 %   $ (7,719 )

Our provision for income taxes includes U.S. federal, foreign, and state income taxes. Income tax provisions for interim periods are based on estimated effective annual income tax rates.

The income tax provisions for each of the quarters ended July 2, 2017 and
July 3, 2016 represent an effective tax rate of 38.2%. There was no change in
the rate from the prior year quarter because of nondeductible acquisition costs
in the prior year being offset by lower deductions in the current year related
to stock based compensation.
Liquidity and Capital Resources
We manage our business to maximize operating cash flows as the primary source of
liquidity. In addition to cash on hand and cash generated by operations, sources
of liquidity include a committed credit facility and access to the public debt
and equity markets. We use our cash to fund investments in our existing core
businesses and for debt repayment, share repurchases, and acquisitions or other
activities.
Cash Flow Summary
Our cash flows from operating, investing and financing activities, as reflected
in the unaudited condensed consolidated statements of cash flows for the
quarters ended July 2, 2017 and July 3, 2016 are summarized as follows:

© Edgar Online, source Glimpses

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