UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the fiscal year ended March 31, 2022 or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the transition period to
Commission file number 1-36597
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
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 | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None.
____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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.
| ☒ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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 September 26, 2021, the aggregate market value of the registrant's voting common stock held by non-affiliates was approximately $2.34 billion (based upon the closing price of the common stock on the New York Stock Exchange on September 24, 2021).
As of May 16, 2022, there were 56,506,406 shares of the registrant's voting common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”) contains “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. Forward-looking statements can be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are based on management's current expectations and assumptions regarding our business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We caution you not to place undue reliance on any forward-looking statements. Numerous risks, uncertainties and other factors could cause our actual results to differ materially from expectations described in such forward-looking statements, including those discussed in Item 1A of this Annual Report as updated by any subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K we file with the Securities and Exchange Commission (the “SEC”).
ITEM 1. BUSINESS
Certain business terms used in this Annual Report are defined in the “Glossary and Acronyms” found at the end of this section, and should be read in conjunction with the consolidated financial statements and related notes included in this Annual Report.
Our Company
Vista Outdoor is as a leading global designer, manufacturer, and marketer of outdoor recreation and shooting sports products. We are headquartered in Anoka, Minnesota, and have 26 manufacturing and distribution facilities in the U.S., Canada, Mexico, and Puerto Rico along with international customer service, sales, and sourcing operations in Asia, Canada, and Europe. We were incorporated in Delaware in 2014.
Reportable Segments and Products
We operate through two reportable segments: Sporting Products and Outdoor Products. Information regarding our segments is further discussed below and in Note 18, Operating Segment Information, to the consolidated financial statements in Part II, Item 8 of this Annual Report.
•Our Sporting Products reportable segment designs, develops, distributes and manufactures ammunition, components, and related equipment and accessories and serves hunters, recreational shooters, federal and local law enforcement agencies and the military. Ammunition products include pistol, rifle, rimfire, and shotshell ammunition, and components. Our Sporting Products reportable segment consists of our Ammunition operating segment, which includes our ammunition-related businesses, including Federal, Remington, CCI, Speer, and HEVI-Shot.
•Our Outdoor Products reportable segment designs, develops, distributes and manufactures gear and equipment to enhance the outdoor experiences of a wide variety of end users, including hunters, hikers, campers, cyclists, skiers, snowboarders, and golfers. Products from the businesses included in this reportable segment include hunting and shooting accessories, personal hydration solutions, outdoor cooking solutions, action sports helmets and goggles, footwear and cycling accessories, eBikes, audio speakers for outdoor sports, golf GPS devices, laser rangefinders, and golf launch monitors and simulators. Our Outdoor Products reportable segment consists of:
•Our Outdoor Accessories operating segment, which includes our Bushnell Optics, Primos, RCBS, BlackHawk!, and Eagle businesses;
•Our Sports Protection operating segment, which includes our Bell, Blackburn, and Giro businesses;
•Our Cycling operating segment, which is comprised of our QuietKat business;
•Our Outdoor Cooking operating segment, which includes our Camp Chef and Fiber Energy businesses;
•Our Hydration operating segment, which is comprised of our CamelBak business; and
•Our Golf operating segment, which includes our Bushnell Golf and Foresight Sports businesses.
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Sporting Products
Our Sporting Products segment generated approximately 57% of our external sales in fiscal year 2022. The product lines within our Sporting Products segment are focused on the following categories:
•Centerfire ammunition for use in sporting rifles, handguns, 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. The Sporting Products segment designs, develops, produces, and sources ammunition for the hunting and sport shooting enthusiast markets, as well as ammunition for local law enforcement, the U.S. government and international markets.
Outdoor Products
Our Outdoor Products segment generated approximately 43% of our external sales in fiscal year 2022. The product lines within our Outdoor Products segment are focused on the following categories:
•E-bikes, helmets, goggles, and accessories for cycling, snow sports, action sports, and power sports;
•Golf launch monitors, golf laser rangefinders, golf GPS devices and other golf technology products;
•Hydration packs, water bottles, and drinkware;
•Outdoor cooking equipment, including grills, cookware, pellets, and camp stoves;
•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;
•Ultralightweight, performance hunting gear designed for backcountry use;
•Hunting and shooting accessories, including reloading equipment, clay targets, and premium gun care products; and
•Tactical accessories, including holsters, duty gear, bags and packs.
Planned Separation of Outdoor Products and Sporting Products
On May 5, 2022, we announced that our Board of Directors has unanimously approved preparations for the separation of our Outdoor Products and Sporting Products reportable segments into two independent, publicly-traded companies (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 the transaction will be completed in calendar year 2023, subject to final approval by our Board of Directors, a Form 10 registration statement being declared effective by the U.S. Securities and Exchange Commission, regulatory approvals and satisfaction of other conditions. There can be no assurance regarding the ultimate timing of the proposed transaction or that the transaction will be completed.
We expect that the Planned Separation will create a number of benefits for Outdoor Products and Sporting Products, including:
•Enhanced strategic focus with supporting resources: Each company will have enhanced strategic focus with resources to support its specific operational needs and growth drivers.
•Tailored capital allocation priorities: Each company will have a tailored capital allocation philosophy that is better suited to support its distinctive business model and long-term goals.
•Strengthened ability to attract and retain top talent: Each company will benefit from enhanced ability to attract and retain top talent that is ideally suited to execute its strategic and operational objectives.
•Compelling value for shareholders: Each company will present a differentiated and compelling investment opportunity based on its particular business model.
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•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.
Sales Channels
We serve the outdoor sports and recreation markets through a diverse portfolio of well-recognized brands that provide consumers with a wide range of performance-driven, high-quality, and innovative products. Our broad range of consumers include outdoor enthusiasts, hunters and recreational shooters, golfers, cyclists, backyard grillers, campers, athletes, as well as law enforcement and military professionals. We sell our products through a wide variety of mass, specialty and independent retailers and distributors, such as Academy, Amazon, Bass Pro Shops/Cabela's, Dick's Sporting Goods, Kiesler Police Supply, Nations Best Sports, Sports Inc., Sports South, Scheels, Sportsman's Warehouse, Target, and Walmart. Some of our products are also sold directly to consumers through the relevant brand's website. We have a scalable, integrated portfolio of brands that allows us to leverage our deep customer knowledge, product development and innovation, supply chain and distribution, and sales and marketing functions across product categories to better serve our retail partners and consumers.
Our Brands
Our brands are renowned and market leaders in most of their categories. Many of our brands have a rich, long-standing heritage, such as Remington Ammunition, founded in 1816, Federal Premium, founded in 1922 and Bushnell, founded in 1948. We also have brands who have emerged with consumer and technological advances, such as e-bike business QuietKat and golf technology business Foresight Sports. We believe this brand heritage supports our leading market share positions in multiple categories. For example, we believe we hold the No.1 sales position in the U.S. markets for commercial ammunition, golf rangefinders, bike and hike hydration packs, and biking helmets and accessories. To maintain the strength of our brands and drive revenue growth, we invest in product innovation to continuously improve the performance, quality, and affordability of our products while providing world-class customer support to our retail partners and end consumers. We have received numerous awards for product innovation by respected industry publications and for customer service from our retail customers. Additionally, high-profile professional athletes, sportsmen and sportswomen, as well as sponsored and organic influencers use and endorse our products, which we believe influences the purchasing behavior of recreational consumers.
The brands in our Sporting Products and Outdoor Products segments include the following:
| Sporting Products | Outdoor Products | |||||||||||||
| Alliant Powder | Bee Stinger | Gunmate | ||||||||||||
| CCI | Bell | Hoppe's | ||||||||||||
| Estate Cartridge | Blackburn | Krash | ||||||||||||
| Federal Premium | Blackhawk | M-Pro 7 | ||||||||||||
| HEVI-Shot | Bushnell | Outers | ||||||||||||
| Remington | Bushnell Golf | Primos | ||||||||||||
| Speer | Butler Creek | QuietKat | ||||||||||||
| CamelBak | Raskullz | |||||||||||||
| Camp Chef | RCBS | |||||||||||||
| Champion Target | Redfield | |||||||||||||
| CoPilot | Simmons | |||||||||||||
| Eagle | Stone Glacier | |||||||||||||
| Fiber Energy Products | Tasco | |||||||||||||
| Foresight Sports | Uncle Mike's | |||||||||||||
| Giro | Venor | |||||||||||||
| Gold Tip | Weaver | |||||||||||||
Market Opportunity
We participate in the global market for consumer goods geared toward outdoor recreation and hunting and recreational shooting related products. Spending on outdoor recreation products in the U.S., including the purchase of gear for bicycling, camping, fishing, hunting, motorcycling, off-roading, snow sports, trail sports, and wildlife viewing, contributed to the economies of all 50 states, and accounted for $374 billion of current-dollar gross domestic product and $689 billion in gross output (consumer spending) in 2020, according to The Bureau of Economic Analysis statistics report released in November, 2021. The report, which covered calendar year 2020, shows that the COVID-19 pandemic related declines in travel and tourism
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had a large impact on outdoor recreation’s overall economic activity but that outdoor participation increased, especially those activities that can be done close-to-home.
Competitive Strengths
Portfolio of Leading Brands Focused on Outdoor Recreation and Hunting and Sporting Related Products
We are the parent company of 39 renowned brands that design, manufacture and market sporting and outdoor products. Together we serve a broad and diverse range of consumers around the globe, including outdoor enthusiasts, golfers, cyclists, backyard grillers, campers, hunters, recreational shooters, athletes, as well as law enforcement and military professionals.
Our reportable segments, Sporting Products and Outdoor Products, provide these consumers with a wide range of performance-driven, high-quality and innovative outdoor and sporting products. Our operating model leverages shared resources across brands to achieve levels of excellence and performance that would be out of reach for any one brand on its own.
We seek to maintain our brand strength by developing performance-enhancing innovations, introducing new products, engaging in product and brand marketing campaigns, providing marketing support to our strategic channel partners, utilizing shared resources through our Supply Chain and Digital Centers of Excellence, and establishing and maintaining a strong
e-commerce presence to capitalize on the ongoing shift by consumers to online shopping. We target selling prices that balance our premium positioning with our focus on affordability to capture a large, diverse and dynamic consumer base. Our brand strength and product innovations allow us to drive sales growth and deliver robust profit margins.
Leading Innovation and Product Development Competencies
In the highly competitive business in which we operate, our tradenames, service marks, and trademarks are important to distinguish our products and services from our competitors. We rely on trade secrets, continuing technological innovations, and licensing arrangements to maintain and improve our competitive position. We also have a portfolio of approximately 1,496 U.S. and foreign patents, and we believe these patents, as well as unpatented research, development, and engineering skills make important contributions to our business. We employ approximately 100 dedicated design and product development professionals across the organization. We are not aware of any facts which would negatively impact our continuing use of any of our tradenames, service marks, trademarks, or patents. By applying our engineering and manufacturing expertise, we have been able to bring to market new and innovative products that maintain product differentiation while targeting affordability for our end consumers. Recent examples of our innovative, market-leading products include:
•Bushnell®, an industry leader in performance optics, released the Fusion X Rangefinding Binoculars and Prime 1800 Laser Rangefinder, both featuring ACTIVSYNC™ technology that automatically transitions readouts from black to red depending on lighting conditions. This year, Bushnell is introducing the Broadhead Laser Rangefinder, the most accurate rangefinder on the market with 0.3-yard accuracy out to 150 yards.
•Federal introduced the 30 Super Carry, the most revolutionary self-defense advancement in nearly 100 years. More than just an all-new cartridge, the compact design represents an entirely new class of ammunition engineered for absolute performance by every measure. With a higher capacity and smaller frame size than the 9mm but with similar muzzle blast, recoil and terminal performance, 30 Super Carry offers a decided advantage.
•For cycling enthusiasts, Bell Helmets announced the all-new XR Spherical helmet, a gravel-focused cycling helmet that offers unmatched protection to riders by using a new outer shell shape and spherical technology. Giro Sport Design, the cycling world’s design leader, released the Eclipse™ Spherical, the fastest road helmet and coolest aero road helmet in the peloton and Merit™ Spherical, a brand new, high-performance trail riding helmet built for fast, flowy trail riding and hard pedaling. All the helmets are built around the added protection of Spherical Technology™ powered by Mips®.
•Camelbak recently launched new and redesigned mountain bike packs as part of its Spring 2022 collection. These new models include the M.U.L.E.®Evo 12, M.U.L.E.® 12 and Lobo™ 9 packs, as well as the Podium® Flow™ 4hydration belt, which all blend premium eco-friendly materials with mountain bike-specific features to create the perfect bag for any and all cycling adventures.
•For avid golfers, Foresight Sports introduced the GC3 golf launch monitor. The new GC3 features a three-camera system that measures ball and club performance data, both outdoors and indoors, with industry-leading precision. Bushnell Golf introduced the Launch Pro, which is a personal golf launch monitor powered by Foresight Sports.
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Proven Manufacturing, Global Sourcing, and Distribution Platform
We believe that our state-of-the-art manufacturing expertise, sourcing and distribution capabilities, and high-quality retail, wholesale and distributor networks allow us to produce, deliver and replenish products in a more efficient and faster manner than our competitors. We believe this speed allows us to better serve the needs of our customers and end consumers and capture market share. We believe the scale and scope of our manufacturing and distribution operations also allows us to be one of the lowest-cost producers in many of our product categories.
Integrated supply chain management is a core focus of our company. We procure large quantities of raw materials for our manufacturing operations and we leverage negotiating disciplines and production methods with the objective of obtaining the best price and delivery available as well as low-cost conversion of raw materials into finished product. We also source finished product both domestically and internationally for global distribution. We continuously seek to improve our vendor base as well as our in-country support and oversight, and through our integrated supply chain management process we seek to provide year-over-year reductions in product costs. We believe the scope and scale of our sourcing network would be difficult to replicate.
Our supply chain and logistics infrastructure gives us the ability to serve a broad array of wholesale and retail customers, many of whom rely on us for services such as category management, marketing campaigns, merchandising and inventory replenishment. We believe our strong wholesale and retail relationships and diverse product offering provide us with a unique competitive advantage.
We maintain positive relationships with our retail partners based on trust and professionalism. Our long-standing commitment to our customers, diverse product offering and focus on profitability for both our company and our retail partners have enabled us to gain shelf space and secure premium placement of our products at many major retailers. Our management team interfaces directly with the executives of many of our top retail partners to ensure we are delivering the products our retailers need to meet the demands of the end consumer in the most efficient and profitable manner possible. Furthermore, we believe our scale allows us to leverage our platform to efficiently and profitably service our largest retail customers. For example, we work with our key retail customers to develop marketing and advertising campaigns, provide inventory replenishment support, and organize product category merchandising plans.
Customers and Marketing
Our primary customers are retailers and distributors who serve outdoor enthusiasts, hunters, recreational shooters, golfers, cyclists, backyard grillers, campers, athletes, as well as law enforcement and military professionals. Sales to our top ten customers accounted for approximately 39% of our consolidated net sales in fiscal year 2022. In fiscal year 2022, U.S. customers represented approximately 86% of our sales and customers outside of the U.S. represented approximately 14% of our sales. Of our fiscal year 2022 sales, approximately 11% was to law enforcement and military professionals. See Note 18, Operating Segment Information, to the consolidated financial statements included in this Annual Report for further information regarding our customers and geographic information regarding our sales.
We believe the shooting sports and outdoor recreation industries are led by enthusiasts with a passion for reliable, high-performance products, who rely on a wide variety of media for opinions and recommendations about available products. We use paid, earned, shared, and owned media to enhance the perception of our brands and products and to reinforce our leadership positions in the market. We supplement this exposure with data-driven print and digital advertising that is designed to maximize reach and return on investment. We have an industry-leading digital media presence that includes YouTube and other social media influencers. Our goal is to strengthen our existing consumers' brand loyalty while at the same time reaching new users of our products.
E-commerce distribution channels, including our brands’ direct-to-consumer websites, represent an increasing portion of our sales across all of our brands. Through our shared E-commerce Center of Excellence, we deploy resources and expertise to all of our brands to help them accelerate the growth of their presence in these channels and respond to changes in consumer shopping behavior.
Quality Assurance
We maintain a disciplined quality assurance process. We set stringent metrics to drive year-over-year quality improvements. We also have customer call centers, which allow us to collect feedback on our customer service to ensure that our customers and end consumers are satisfied with our products and customer service.
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Competition
Competition in the markets in which we operate is based on a number of factors, including price, quality, product innovation, performance, reliability, styling, product features, and warranties, as well as sales and marketing programs. Given the diversity of our product portfolio, we have various significant competitors in each of our markets, including: Nikon and Vortex in the optics market; Hydro Flask, Contigo, Yeti, Osprey, and Nalgene in the hydration systems market; Traeger, Pit Boss, Blackstone, and Lodge in the outdoor cooking market; Schwinn, Bontrager, Smith, Specialized, and Shoei in the bike and snow helmet and accessories markets; Garmin, Nikon and Trackman in the golf electronics market; Winchester Ammunition of Olin Corporation, Clarus, CBC Group, Fiocchi Ammunition, Hornady, PMC, Rio Ammunition, and Wolf in the ammunition market.
Seasonality
Our business experiences a certain level of seasonality. Sales of our spring and summer products, such as golf accessories, can be adversely impacted by unseasonably cold or wet weather in those periods. Our winter sport accessories sales can be negatively impacted by unseasonably warm or dry weather. Sales of our premium hunting accessories are generally highest during the months of August through December due to shipments around the fall hunting season and holidays.
Regulatory Matters
Like many other manufacturers and distributors of consumer products, we are required to comply with numerous laws, rules, and regulations, including those involving labor and employment law, environmental law, consumer product safety, data privacy and security, workplace safety, and the export and import of our products. These laws, rules, and regulations currently impose significant compliance requirements on our business, and more restrictive laws, rules, and regulations may be adopted in the future. We believe we are in material compliance with all applicable domestic and international laws and regulations.
Our operations are subject to numerous international, federal, state, and local laws and regulations relating to environmental protection, including those governing the discharge, treatment, storage, transportation, remediation, and disposal of hazardous materials and wastes, and restoration of damages to the environment, as well as health and safety matters. We believe that our operations are in material compliance with these laws and regulations and that forward-looking, proper and cost-effective management of air, land, and water resources is vital to the long-term success of our business. Our environmental policy identifies key objectives for implementing this commitment throughout our operations. We incur operating and capital costs on an ongoing basis to comply with environmental requirements and could incur significant additional costs as a result of more stringent requirements that may be promulgated in the future.
Some environmental laws, such as the U.S. federal Superfund law and similar state laws, can impose liability, without regard to fault, for the entire cost of the cleanup of contaminated sites on current or former site owners and operators or parties who sent wastes to such sites. We are conducting investigation and/or remediation activities at certain of our current or former sites where impacts from our historical operations have been identified. Certain of our former subsidiaries have been identified as PRPs, along with other parties, in regulatory agency actions associated with hazardous waste sites. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities at these sites, based on currently available information, we do not currently expect 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, however, incur substantial additional costs as a result of any additional obligations imposed or conditions identified at these or other sites in the future.
As a manufacturer and distributor of consumer products, we are subject to various domestic and international consumer product safety laws, such as the Consumer Products Safety Act, which empowers the Consumer Products Safety Commission to investigate and deem certain of our products as unsafe or hazardous. Under certain circumstances, the Consumer Products Safety Commission or similar international agencies could ask a court to require us to repurchase or recall one or more of our products. In addition, laws regulating certain consumer products exist in some cities and states, as well as in other countries in which we sell our products.
While we do not manufacture firearms, we are also subject to the rules and regulations of the ATF and various state and international agencies that control the manufacture, export, import, distribution, and sale of firearms, explosives, and ammunition. If we fail to comply with these rules and regulations, these agencies may limit our growth or business activities, or, in extreme cases, revoke our licenses to do business. Our business, as well as the business of all producers and marketers of ammunition, is also subject to numerous federal, state, local, and foreign laws, regulations and protocols. Applicable laws:
•require the licensing of all persons manufacturing, exporting, importing, or selling ammunition as a business;
•require labeling and tracking the acquisition and disposition of certain types of ammunition, and certain related products;
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•regulate the use and storage of gun powder or other energetic materials;
•regulate the interstate sale of certain ammunition;
•limit the mail-order sale of ammunition;
•regulate our employment of personnel with certain criminal convictions; and
•restrict access to ammunition manufacturing facilities for certain individuals from other countries or with criminal convictions.
In some cases, the handling of our technical data and the international sale of our products is also regulated by the U.S. Department of State and Department of Commerce. These agencies oversee the export of certain of our products including ammunition and night vision devices and related technical data, amongst other products. In many instances, we must obtain export authorizations for international shipments. To date, most of our requests for export licenses have been approved. These agencies can impose civil and criminal penalties, including preventing us from exporting our products, for failure to comply with applicable laws and regulations.
We are also regulated by the U.S. Department of Homeland Security, which regulates the out-bound and in-bound movement of certain of our products, as well as components, parts, and materials used in our manufacturing processes. The agency is authorized to detain and seize shipments, as well as penalize us for failure to comply with applicable regulations. The agency also works closely with the Department of State and the Department of Commerce to protect national security.
Human Capital
People are at the center of our success. We employ approximately 6,900 people spread across multiple states, Puerto Rico, and numerous countries. Our employees lead in the fields of manufacturing, distribution, supply chain management, finance and marketing, among many other talents and specialties. In total, 71% of our employees are in production roles, directly building or distributing world-class outdoor recreation gear and products for our consumers. We have no union-represented employees. We believe that our employee relations generally are good.
Support for our people drives us at every level. We prioritize employee success and well-being through a strong corporate infrastructure that supports employee engagement, recruiting, professional development, safety, diversity, compensation, and benefits. Our overall commitment and value proposition for our employees begins with our culture and is rooted in the success of our business. When we do well, it enables us to do good for our communities, employees, and charitable partners.
Employee Engagement
We are committed to two-way conversations with employees. The Chief Executive Officer and business unit leaders hold regular employee town hall meetings where they provide updates and take employee questions. We regularly update employees with company news, important notices, our philanthropic efforts, and employee stories through many channels, including our internal digital hub (InSite), social media, and our public-facing website. These employee engagement initiatives are especially important across our diverse network which includes multiple locations across the globe and a diverse set of working environments, including production, office, hybrid and remote. To that end, we were pleased to be recognized by Forbes as one of America’s Best Midsize Employers in February 2021 and by Newsweek as one of America’s Most Trusted Companies in March 2022, which demonstrates that our efforts to engage and support employees are well received.
Recruiting
We place a large emphasis on recruiting talented people to join our company. We prioritize the hiring of smart, energetic and passionate people who not only have the skills we need to thrive in the marketplace, but who also have diverse experiences and perspectives. We have partnered with a variety of organizations to expand our recruiting base so that we can better attract talented veterans, people of color, women and others with backgrounds who would strengthen our business and underlying culture.
Professional Development
We take career development seriously. We go to great lengths to make learning and knowledge available to our employees. We deploy a variety of worker training programs on our factory and production floors, including the use of internal leaders and outside safety trainers. Programs such as tuition reimbursement, internships and employee scholarship programs are some of the ways we are investing in our people and their knowledge. We know that these investments are not only good for people, but they are also good for our business. We have seen an increase in internal promotions from all levels of the organization.
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Safety
We operate in a highly-regulated environment in the U.S. and international markets. U.S. federal, state, and local governmental entities, and foreign governments regulate many aspects of our business through product safety standards, laws and regulations.
While employees across our locations work to ensure compliance with the product safety laws and regulations that apply to their products, we have a team of dedicated professionals within the corporate Compliance Department who oversee all aspects of product safety and compliance across the company. Our product safety and compliance personnel have broad and diverse academic and experience credentials and are often sought out by regulators, law enforcement, other industry participants and internal stakeholders to serve as expert consultants and witnesses. This organizational structure, together with robust internal policies and procedures, help ensure that we meet our continuing obligations to regulators and consumers throughout the product life cycles and to keep our employees safe.
On the consumer side, as an outdoor sports and recreation company, we believe that our consumers should be safe when engaging in the outdoor activity of their choice. We partner with a variety of organizations who share these same goals, support policies that advance safety initiatives and use our brand platforms to educate and share best practices for the safe use of our products.
Diversity and Inclusion
We continuously look for ways to be a more diverse and inclusive company, from improving our recruiting and marketing efforts to expanding career growth opportunities and external partnerships. During fiscal year 2022, we joined Together Outdoors Coalition (TO), which provides a cross-sector collaborative learning space for organizations, individuals, business leaders, federal agencies, activists, manufacturers and service providers who share a commitment to making the outdoors a more welcoming, safe, and enjoyable place for people of all races, ethnicities, abilities, faiths, identities, genders, orientations, and backgrounds.
In fiscal year 2021, we began disclosing diversity and inclusion metrics to provide both benchmarks for where we currently stand, and goals for us to strive to meet in the future. Our metrics for the last two fiscal years include:
| March 31, | ||||||||||||||
| Statistic | 2022 | 2021 | ||||||||||||
| % of US employees identifying as persons of color (non-white) | 20% | 19% | ||||||||||||
| % of US Leadership (manager & above) identifying as persons of color* | 10% | 9% | ||||||||||||
| % of US employees who are female | 28% | 29% | ||||||||||||
| % of US Leadership (manager & above) who are female | 29% | 27% | ||||||||||||
| % of US employees who are veterans | 7% | 7% | ||||||||||||
*Our fiscal year 2022 metrics expand disclosure to all managers and above who identify as persons of color; the fiscal year 2021 data has been updated accordingly.
Compensation
We believe in equal pay for equal work. We believe pay and compensation should match the talent, experience and skill set of a person, and nothing else. We regularly review our compensation practices and benchmark our performance to others in the industry to ensure we are fulfilling our obligations of fair pay.
Benefits
Our benefit programs offer comprehensive coverage to help protect our employees’ health, family, and future, and are an important part of the total compensation we provide. We offer both company-provided and optional benefits, including basic life insurance, medical, prescription, telemedicine, and an employee product purchase program. We offer a 401(k) savings plan, with a higher-than-average match for participating employees.
We expanded our offerings as the COVID-19 pandemic changed the landscape in 2020. We partnered with Care.com to give our employees access and discounts to childcare and other support as they balanced their households during lockdowns and closures. We’ve also expanded our employee assistance program to include additional mental health offerings and access to services to support our employees during the trials and changes brought about from the COVID-19 pandemic.
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The Vista Outdoor Employee Assistance Fund was created in fiscal year 2021 to help employees who are facing financial hardship immediately following a natural disaster or an unforeseen personal hardship. In its first year, the fund aided five employees facing urgent situations. This fund relies primarily on payroll deductions from employees and support from Vista Outdoor. Every contribution helps, and when combined with the donations, can provide a tax-free grant to help a fellow employee in need when they are facing an unexpected situation.
Available Information
You can find reports on our company filed with the SEC free of charge on our internet site at www.vistaoutdoor.com under the "Investor Relations" heading. These include our annual report, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statement and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We make these reports available as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information found on our website is not part of this or any other report that we file with or furnish to the SEC. Our SEC filings are also available to the public over the Internet at the SEC’s website at www.sec.gov.
Glossary and Acronyms
2018 ABL Revolving Credit Facility: Refers to the Vista Outdoor Inc. senior secured asset-based credit facility comprised of $20 million in first-in, last-out (“FILO”) revolving credit commitments and $430 million in non-FILO revolving credit commitments under the Asset-Based Revolving Credit Agreement, dated as of November 19, 2018, among Vista Outdoor Inc., the Additional Borrowers from time to time party thereto, the Lenders party thereto and Wells Fargo Bank, National Association, as amended from time-to-time.
2021 ABL Revolving Credit Facility: Refers to the Vista Outdoor Inc. senior secured asset-based credit facility comprised of $450 million revolving credit commitments under the Asset-Based Revolving Credit Agreement, dated as of March 31, 2021, among Vista Outdoor Inc., the Additional Borrowers from time to time party thereto, the Lenders party thereto and Capital One, National Association.
4.5% Notes: Refers to the Vista Outdoor Inc. secured senior notes due 2029 (the “4.5% Notes”)
5.875% Notes: Refers to the Vista Outdoor Inc. secured senior notes due 2023, redeemed on March 12, 2021 (the “5.875% Notes”)
EBIT: Earnings (loss) before interest and income taxes
Lake City: Refers to the Lake City Army Ammunition Plant operated by a subsidiary of Olin Winchester.
Vista Outdoor, the Company, we, our, and us: Refers to Vista Outdoor Inc.
ATF: Bureau of Alcohol, Tobacco, Firearms and Explosives
PRP: Potentially responsible party
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ITEM 1A. RISK FACTORS
We operate in a rapidly changing business environment that involves numerous risks and uncertainties. The following discussion addresses risks and uncertainties that could cause, or contribute to causing, our actual results to differ from our expectations in material ways. These risks and uncertainties, or other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition. The trading price of our common stock could also decline due to any of these risks. The following information should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report.
Risks Related to Our Operations
Significant supplier capacity constraints, supplier production disruptions, supplier quality issues or price increases could increase our operating costs and adversely impact the competitive positions of our products.
Our reliance on third-party suppliers for various product components and finished goods exposes us to volatility in the availability, quality and price of these product components and finished goods. A disruption in deliveries from our third-party suppliers, including as a result of natural disasters and public health crises or other significant catastrophic events, such as the global COVID-19 pandemic, capacity constraints, production disruptions, price increases or decreased availability of raw materials or commodities could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. For example, the closure of certain of our suppliers' manufacturing operations in Asia in response to the COVID-19 pandemic temporarily affected the availability of products for certain of our brands in the fourth quarter of fiscal year 2020, fiscal year 2021, and fiscal year 2022, which had a negative impact on our revenue. Future closures of our suppliers' manufacturing operations in response to the COVID-19 pandemic could have an adverse effect on our revenue in future periods.
Our inability to obtain sufficient quantities of components, parts, raw materials, and other supplies from independent sources necessary for the production of our products could also result in reduced or delayed sales or lost orders. Any delay in or loss of sales or orders could adversely impact our results of operations. Many of the components, parts, raw materials, and other supplies used in the production of our products are available only from a limited number of suppliers. We do not have long-term supply contracts with some of these suppliers. As a result, we could be subject to increased costs, supply interruptions or orders and difficulties in obtaining materials. Our suppliers also may encounter difficulties or increased costs in obtaining the materials necessary to produce their products that we use in our products. The time lost in seeking and acquiring new sources could have an adverse effect on our business, financial condition or results of operations.
In addition, our supply contracts are generally not exclusive. As a result, our suppliers may provide similar supplies and materials to our competitors, some of which could potentially purchase these supplies and materials in significantly greater volume than we do. Our competitors could enter into restrictive or exclusive arrangements with these suppliers that could impair or eliminate our access to necessary supplies and materials.
Quality issues experienced by third-party suppliers could also adversely affect the quality and effectiveness of our products and result in liability and reputational harm.
Shortages of, and price increases for, labor, components, parts and other supplies, as well as commodities used in the manufacture and distribution of our products, may delay or reduce our sales and increase our costs, thereby harming our results of operations.
We manufacture a significant portion of our products at plants that we own, including ammunition products. Shortages of, and cost increases for, labor and other inputs to the manufacturing process could delay or reduce our sales and reduce our gross margins and thereby have an adverse effect on our financial condition and results of operations.
Although we manufacture many of the components for our products, we purchase from third-parties finished goods, important components, and parts. The costs of these components and parts are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors that are not predictable or within our control, including natural disasters and public health crises or other significant catastrophic events, such as the global COVID-19 pandemic. We also use numerous commodity materials in producing and testing our products, including copper, lead, plastics, steel, wood, and zinc. Commodity prices could increase, and any such increase in commodity prices may harm our results of operations.
Higher prices for electricity, natural gas, metals, and fuel increase our production and shipping costs. A significant shortage, increased prices or interruptions in the availability of these commodities would increase the costs of producing and
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delivering products to our customers and would be likely to negatively affect our earnings. Commodity costs have varied significantly during recent fiscal years and remain a volatile element of our costs.
Seasonality and weather conditions may cause our results of operations to vary from quarter to quarter.
Because many of the products we sell are used for seasonal outdoor sporting activities, our results of operations may be significantly impacted by unseasonable weather conditions. For example, our winter sport accessories sales are dependent on cold winter weather and snowfall, and can be negatively impacted by unseasonably warm or dry weather. Conversely, sales of our spring and summer products, such as golf accessories, can be adversely impacted by unseasonably cold or wet weather. Accordingly, our sales results and financial condition will typically suffer when weather patterns do not conform to seasonal norms.
Sales of our hunting accessories are highest during the months of August through December due to shipments around the fall hunting season and holidays. In addition, sales of our ammunition have historically been lower in our first fiscal quarter. The seasonality of our sales may change in the future. Seasonal variations in our results of operations may reduce our cash on hand, increase our inventory levels and extend our accounts receivable collection periods. This in turn may cause us to increase our debt levels and interest expense to fund our working capital requirements.
Our revenues and results of operations may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.
Our revenues and results of operations have fluctuated significantly in the past and may fluctuate significantly in the future due to various factors, including, but not limited to:
•market acceptance of our products and services;
•general economic conditions;
•the timing of large domestic and international orders;
•cancellation of existing orders;
•the outcome of any existing or future litigation;
•adverse publicity surrounding our products, the safety of our products or the use of our products;
•changes in our sales mix;
•new product introduction costs;
•complexity in our integrated supply chain;
•increased raw material expenses;
•changes in amount and/or timing of our operating expenses;
•natural disasters and public health crises or other significant catastrophic events, such as the global COVID-19 pandemic, in markets in which we, our customers, suppliers and manufacturers operate;
•changes in laws and regulations that may affect the marketability of our products;
•the domestic political environment, including debate over the regulation of ammunition and related products; and
•uncertainties related to changes in macroeconomic and/or global conditions, including as a result of the military conflict in Ukraine and the imposition of sanctions on Russia.
As a result of these and other factors, we believe that period-to-period comparisons of our results of operations may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.
We are exposed to risks associated with acquisitions, which could adversely affect our future financial results.
Our business strategy includes growth through acquisitions or other transactions. The expected benefits of any future acquisitions or other transactions may not be realized. Costs could be incurred on pursuits or proposed acquisitions that may never close that could significantly impact our business, financial condition or results of operations.
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Additionally, after any acquisition, unforeseen issues and/or costs could arise that adversely affect our anticipated returns or that are otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual results of operations may vary significantly from initial estimates due to a variety of factors, including general economic conditions affecting the market for our products.
Furthermore, if, due to declining market conditions or other factors, we determine that the carrying value of the goodwill or other intangible assets associated with an acquired business exceeds the fair value of such assets, we may be required to record a significant impairment charge in the period during which such determination was made, which would negatively affect our results of operations. For example, in fiscal year 2020 we recorded impairment charges to the goodwill and identifiable indefinite-lived intangible assets associated with the Outdoor Recreation reporting unit.
We may engage in other strategic business transactions. Such transactions could result in unanticipated costs and difficulties, may not achieve intended results and may require significant time and attention from management, which could have an adverse impact on our business, financial condition or results of operations.
Risks may also include potential delays in adopting our financial and managerial controls and reporting systems and procedures, greater than anticipated costs and expenses related to the integration of the acquired business with our business, potential unknown liabilities associated with the acquired company, challenges inherent in effectively managing an increased number of employees in diverse locations and the challenge of creating uniform standards, controls, procedures, policies, and information systems. These and other risks relating to our acquisitions could have an adverse effect on our business, financial condition or results of operations.
Our results of operations could be materially harmed if we are unable to forecast demand for our products accurately.
We often schedule internal production and place orders for products with third-party suppliers before receiving firm orders from our customers. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our products include:
•an increase or decrease in consumer demand for our products or for the products of our competitors;
•our failure to accurately forecast customer acceptance of new products;
•new product introductions by competitors;
•changes in our relationships with customers;
•changes in general market conditions or other factors, which may result in cancellations of orders or a reduction or increase in the rate of reorders placed by retailers, including as a result of natural disasters and public health crises or other significant catastrophic events, such as the global COVID-19 pandemic;
•changes in laws and regulations governing the activities for which we sell products, such as hunting and shooting sports;
•weak economic conditions or consumer confidence, which could reduce demand for discretionary items such as our products; and
•the domestic political environment, including debate over the regulation of ammunition and related products.
Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on our business, financial condition or results of operations. If we underestimate demand for our products, our manufacturing facilities or third-party suppliers may not be able to create products to meet customer demand, and this could result in delays in the shipment of products and lost revenues, as well as damage to our reputation and customer relationships. We may not be able to manage inventory levels successfully to meet future order and reorder requirements.
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A disruption in the service or a significant increase in the cost of our primary delivery and shipping services for our products and component parts or a significant disruption at shipping ports could have a negative impact on our business.
We use Federal Express (“FedEx”) for a significant portion of ground shipments of products to our U.S. customers. We use air carriers and ocean shipping services for most of our international shipments of products. Furthermore, many of our finished goods and many of the components we use to manufacture our products are shipped to us via air carrier and shipping services. During the year ended March 31, 2022, international shipping to the United States was disrupted and delayed due to congestion in west coast ports. If there is any continued or additional significant interruption in service by such providers or at airports or shipping ports, we may be unable to engage alternative suppliers or to receive or ship goods through alternate sites in order to deliver our products or receive finished goods or components in a timely and cost-efficient manner. As a result, we could experience manufacturing delays, increased manufacturing and shipping costs and lost sales as a result of missed delivery deadlines and product demand cycles. Any significant interruption in FedEx services, air carrier services, ship services or at airports or shipping ports could have a negative impact on our business. Furthermore, if the cost of delivery or shipping services increases significantly and the additional costs cannot be covered by product pricing, our operating results could be materially adversely affected.
We face risks relating to our international business operations that could adversely affect our business, financial condition or results of operations.
Our ability to maintain the current level of operations in our existing international markets and to capitalize on growth in existing and new international markets is subject to risks associated with our doing business internationally, including:
•issues related to managing international operations;
•potentially adverse tax developments;
•lack of sufficient protection for intellectual property in some countries;
•currency exchange;
•import and export controls;
•social, political, and economic instability in the countries in which we operate;
•changes in economic conditions;
•uncertainties related to changes in macroeconomic and/or global conditions, including as a result of the military conflict in Ukraine and the imposition of sanctions on Russia;
•the occurrence of natural disasters, public health crises or other significant catastrophic events, such as the global COVID-19 pandemic, in countries in which we operate;
•local laws and regulations, including those governing labor, product safety and environmental protection;
•changes to international treaties and regulations; and
•limitations on our ability to efficiently repatriate cash from our foreign operations.
Any one or more of these risks could adversely affect our business, financial condition or results of operations.
Some of our products contain licensed, third-party technology that provides important product functionality and features. The loss or inability to obtain and maintain any such licenses could have a material adverse effect on our business.
Some of our products contain technology licensed from third-parties that provides important product functionality and features. We cannot assure you that we will have continued access to this technology. For example, if the licensing company ceases to exist, either as a result of bankruptcy, dissolution or purchase by a competitor, we may lose access to important third-party technology and may not be able to obtain replacement technology on favorable terms or at all. In addition, legal actions, such as intellectual property actions, brought against the licensing company could impact our future access to the technology. Any of these actions could negatively affect our technology licenses, thereby reducing the functionality and features of our products, and adversely affect our business, financial condition or results of operations.
Failure to attract and retain key personnel could have an adverse effect on our results of operations.
Our future success will depend in part on the continued service of key personnel and our ability to attract, retain and develop key managers, designers, sales and information technology professionals and others. We face intense competition for
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these individuals worldwide. We may not be able to attract qualified new employees or retain existing employees, which may have a material adverse effect on our financial condition, results of operations or cash flows.
Upon the completion of the Planned Separation, our current Chief Executive Officer, Christopher T. Metz, and our current Chief Financial Officer, Sudhanshu Priyadarshi, are expected to leave their respective positions at the Company in order to join the management team of the new Outdoor Products company being spun-off (“Outdoor Products SpinCo”). The departure of our current Chief Executive Officer and our current Chief Financial Officer could adversely affect our ability to operate following the Planned Separation.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, public health crisis (such as the global COVID-19 pandemic), cyber-attack, terrorist attack or other catastrophic event could cause delays in completing sales, providing services or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our results of operations.
In addition, damage or disruption to our manufacturing and distribution capabilities or those of our suppliers because of a major earthquake, weather event, public health crisis, cyber-attack, terrorist attack or other catastrophic event could impair our ability or our suppliers' ability to manufacture or sell our products. If we do not take steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, such events could have a material adverse effect on our business, financial condition or results of operations, as well as require additional resources to restore our supply chain.
Some of our products involve the manufacture or handling of a variety of explosive and flammable materials. From time to time, these activities have resulted in incidents that have temporarily shut down or otherwise disrupted some manufacturing processes, causing production delays and resulting in liability for workplace injuries and fatalities. We have safety and loss prevention programs that require detailed pre-construction reviews of process changes and new operations, along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies. We cannot assure you, however, that we will not experience similar incidents in the future or that any similar incidents will not result in production delays or otherwise have a material adverse effect on our business, financial condition or results of operations.
Risks Related to the Markets for Our Products
Our sales are highly dependent on purchases by several large retail customers, and we may be adversely affected by the loss of, or any significant decline in sales to, one or more of these customers.
The U.S. retail industry serving the outdoor recreation market has become relatively concentrated. Sales to the top ten customers accounted for approximately 39% of our consolidated net sales in fiscal year 2022. Further consolidation in the U.S. retail industry could increase the concentration of our retail store customer base in the future.
Although we have long-established relationships with many of our retail customers, as is typical in the markets in which we compete, we do not have long-term purchase agreements with our customers. As such, we are dependent on individual purchase orders. As a result, these retail customers would be able to cancel their orders, change purchase quantities from forecast volumes, delay purchases, change other terms of our business relationship or cease to purchase our products entirely. Our customers’ purchasing activity may also be impacted by general economic conditions as well as natural disasters and public health crises or other significant catastrophic events, such as the global COVID-19 pandemic. For example, several large retail outdoor products retailers have recently closed many of their locations in response to the COVID-19 pandemic, which has resulted in reduced orders from those customers and negatively impacted sales revenue for several of our brands. A continuation of such store closures, or further closures after reopening because of a resurgence of the COVID-19 pandemic, would have an adverse effect on our future sales revenue.
The loss of any one or more of our retail customers or significant or numerous cancellations, reductions, delays in purchases or changes in business practices by our retail customers could have an adverse effect on our business, financial condition or results of operations including but not limited to reductions in sales volumes and profits, inability to collect receivables, and increases in inventory levels.
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Competition in our industry may hinder our ability to execute our business strategy, maintain profitability or maintain relationships with existing customers.
We operate in a highly competitive industry and we compete against other manufacturers that have well-established brand names and strong market positions. Given the diversity of our product portfolio, we have various significant competitors in each of our markets, including: Nikon and Vortex in the optics market; Hydro Flask, Contigo, Yeti, Osprey, and Nalgene in the hydration systems market; Traeger, Pit Boss, Blackstone, and Lodge in the outdoor cooking market; Schwinn, Bontrager, Smith, Specialized, and Shoei in the bike and snow helmet and accessories markets; Garmin, Nikon, and Trackman in the golf electronics market; Winchester Ammunition of Olin Corporation, Clarus, CBC Group, Fiocchi Ammunition, Hornady, PMC, Rio Ammunition, and Wolf in the ammunition market.
Competition in the markets in which we operate is based on a number of factors, including price, quality, product innovation, performance, reliability, styling, product features and warranties, as well as sales and marketing programs. Competition could result in price reductions, reduced profits or losses or loss of market share, any of which could have a material adverse effect on our business, financial condition or results of operations. Certain of our competitors may be more diversified than us or may have financial and marketing resources that are substantially greater than ours, which may allow them to invest more heavily in intellectual property, product development and advertising. Since many of our competitors also source their products from third-parties, our ability to obtain a cost advantage through sourcing is reduced.
Certain of our competitors may be willing to reduce prices and accept lower profit margins to compete with us. Further, retailers often demand that suppliers reduce their prices on mature products, which could lead to lower margins.
Our products typically face more competition internationally where foreign competitors manufacture and market products in their respective countries, which allows those competitors to sell products at lower prices, which could adversely affect our competitiveness.
In addition, our products compete with many other sporting and recreational products for the discretionary spending of consumers. Failure to effectively compete with these competitors or alternative products could have a material adverse effect on our performance.
Our success depends upon our ability to introduce new compelling products into the marketplace and respond to customer preferences.
Our efforts to introduce new products into the marketplace may not be successful, and any new products that we introduce may not result in customer or market acceptance. We both develop and source new products that we believe will match customer preferences. The development of new products is a lengthy and costly process and may not result in the development of a successful product. In addition, the sourcing of our products is dependent, in part, on our relationships with our third-party suppliers. If we are unable to maintain these relationships, we may not be able to continue to source products at competitive prices that both meet our standards and appeal to our customers. Failure to develop or source and introduce new products that consumers want to buy could decrease our sales, operating margins and market share and could adversely affect our business, financial condition or results of operations.
Even if we are able to develop or source new products, our efforts to introduce new products may be costly and ineffective. When introducing a new product, we incur expenses and expend resources to market, promote and sell the new product. New products that we introduce into the marketplace may be unsuccessful or may achieve success that does not meet our expectations for a variety of reasons, including failure to predict market demand, delays in introduction, unfavorable cost comparisons with alternative products and unfavorable performance. Significant expenses related to new products that prove to be unsuccessful for any reason will adversely affect our results of operations.
Customer preferences include the choice of sales channels. We may not be able to successfully respond to shifting preferences of the end consumer from brick and mortar retail to online retail. Our efforts to introduce new sales channels to respond to such a shift may be costly and ineffective.
Risks Related to Our Brands and Reputation
Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation would likely have an adverse effect on our business.
Our brand recognition and reputation are critical aspects of our business. We believe that maintaining and enhancing our brands as well as our reputation are critical to retaining existing customers and attracting new customers. We also believe that the importance of our brand recognition and reputation will continue to increase as competition in the markets in which we compete continues to develop.
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Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our advertising, promotion, public relations and marketing programs. These brand promotion activities may not yield increased revenue and the effectiveness of these activities will depend on a number of factors, including our ability to:
•determine the appropriate creative message, media mix and markets for advertising, marketing and promotional initiatives and expenditures;
•identify the most effective and efficient level of spending in each market, medium and specific media vehicle; and
•effectively manage marketing costs, including creative and media expenses, in order to maintain acceptable customer acquisition costs.
We may implement new marketing and advertising strategies with significantly higher costs than our current channels, which could adversely affect our results of operations. Implementing new marketing and advertising strategies could also increase the risk of devoting significant capital and other resources to endeavors that do not prove to be cost effective. We also may incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses, and our marketing and advertising expenditures may not generate sufficient levels of brand awareness or result in increased revenue. Even if our marketing and advertising expenses result in increased revenue, the increase in revenue might not offset our related marketing and advertising expenditures. If we are unable to maintain our marketing and advertising channels on cost-effective terms or replace or supplement existing marketing and advertising channels with similarly or more cost-effective channels, our marketing and advertising expenses could increase substantially, our customer base could be adversely affected and our business, financial condition or results of operations could be adversely impacted.
Competitors have imitated and attempted to imitate, and will likely continue to imitate or attempt to imitate, our products and technology, particularly in countries overseas where counterfeiting is more prevalent. If we are unable to protect or preserve our brand image and proprietary rights, our business may be harmed. As we increase our sales overseas, we may experience increased counterfeiting of our products.
In addition, certain of our products and brands benefit from endorsements and support from particular sporting enthusiasts, athletes or other celebrities, and those products and brands may become personally associated with those individuals. As a result, sales of the endorsed products could be materially and adversely affected if any of those individuals’ images, reputations or popularity were to be negatively impacted.
Use of social media to disseminate negative commentary and boycotts may adversely impact our business.
There has been a substantial increase in the use of social media platforms, including blogs, social media websites, and other forms of internet-based communications, which allow individuals access to a broad audience of consumers and other interested persons. Negative commentary regarding us or our brands may be posted on social media platforms at any time and may have an adverse impact on our reputation, business, or relationships with third-parties, including suppliers, customers, investors, and lenders. Consumers value readily available information and often act on such information without further investigation and without regard to its accuracy or context. The harm may be immediate without affording us an opportunity for redress or correction.
Social media platforms also provide users with access to such a broad audience that collective action, such as boycotts, can be more easily organized. Such actions could have an adverse effect on our business, financial condition, results of operations and or cash flows.
Further, we serve the outdoor sports and recreation markets through a diverse portfolio of 39 brands that appeal to a broad range of end consumers. The perspectives of the broad range of consumers we serve are varied and can cause conflicting views across brands.
Legal and Regulatory Risks
We manufacture and sell products that create exposure to potential product liability, warranty liability or personal injury claims and litigation.
Some of our products are used in applications and situations that involve risk of personal injury and death. Our products expose us to potential product liability, warranty liability, and personal injury claims and litigation relating to the use or misuse of our products including allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product or activities associated with the product, negligence and strict liability. If successful, such claims could have a material adverse effect on our business.
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Defects in our products could reduce demand for our products and result in a decrease in sales and market acceptance and damage to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. In addition, we obtain many of our products and component parts from third-party suppliers and may not be able to detect defects in such products or component parts until after they are sold. Defects in our products may result in a loss of sales, recall expenses, delay in market acceptance and damage to our reputation and increased warranty costs, which could have a material adverse effect on our business, financial condition or results of operations.
Although we maintain product liability insurance in amounts that we believe are reasonable, we may not be able to maintain such insurance on acceptable terms, if at all, in the future and product liability claims may exceed the amount of our insurance coverage. In addition, our reputation may be adversely affected by such claims, whether or not successful, including potential negative publicity about our products.
We may incur substantial litigation costs to protect our intellectual property, and if we are unable to protect our intellectual property, we may lose our competitive advantage. We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.
Our future success depends in part upon our ability to protect our intellectual property. Our protective measures, including patents, trademarks, copyrights, trade secret protection and internet identity registrations, may prove inadequate to protect our proprietary rights and market advantage. The right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our failure to stop the misuse by others of our trademarks and service marks may lead to our loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers. The scope of any patent to which we have or may obtain rights may not prevent others from developing and selling competing products. In addition, our patents may be held invalid upon challenge, or others may claim rights in, or ownership of, our patents. Moreover, we may become subject to litigation with parties that claim, among other matters, that we infringed their patents or other intellectual property rights. The defense and prosecution of patent and other intellectual property claims are both costly and time-consuming and could result in a material adverse effect on our business and financial position.
Also, any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management's attention from our business. If our products were found to infringe a third-party's proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to continue to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. Rights holders may demand payment for past infringements or force us to accept costly license terms or discontinue use of protected technology or works of authorship.
We may become involved in litigation regarding patents and other intellectual property rights. Other companies, including our competitors, may develop intellectual property that is similar or superior to our intellectual property, duplicate our intellectual property or design around our patents, and may have or obtain patents or other proprietary rights that would prevent, limit or interfere with our ability to make, use or sell our products. Effective intellectual property protection may be unavailable or limited in some foreign countries in which we sell products or from which competing products may be sold.
Unauthorized parties may attempt to copy or otherwise use aspects of our intellectual property and products that we regard as proprietary. Our means of protecting our proprietary rights in the U.S. or abroad may prove to be inadequate, and competitors may be able to develop similar intellectual property independently. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the markets for our products.
Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions because our business could be harmed if we fail to enforce and protect our intellectual property rights. Even if the outcome is favorable, an interference proceeding could result in substantial costs to us and disrupt our business.
In the future, we also may need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition or results of operations.
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We are subject to extensive regulation and could incur fines, penalties and other costs and liabilities under such requirements.
Like other global manufacturers and distributors of consumer products, we are required to comply with a wide variety of federal, state and international laws, rules and regulations, including those related to consumer products and consumer protection, advertising and marketing, labor and employment, data protection and privacy, intellectual property, workplace safety, the environment, the import and export of products, and tax. See Item 1 “Business-Regulatory Matters” of this Annual Report for a description of the various laws and regulations to which our business is subject. Our failure to comply with applicable federal, state and local laws and regulations may result in our being subject to claims, lawsuits, fines and adverse publicity that could have a material adverse effect on our business, results of operations and financial condition. These laws, rules and regulations currently impose significant compliance requirements on our business, and more restrictive laws, rules and regulations may be adopted in the future.
Changes in government policies and firearms and ammunition legislation could adversely affect our financial results.
The sale, purchase, ownership and use of firearms and ammunition are subject to numerous and varied federal, state and local governmental regulations. Sales of our ammunition products are correlated with sales of firearms, and legislation restricting the sale or use of firearms could negatively affect sales of our ammunition products. Federal laws governing firearms and ammunition include the National Firearms Act, the Federal Firearms Act, the Arms Export Control Act and the Gun Control Act of 1968. These laws generally govern the manufacture, import, export, sale and possession of firearms and ammunition. We hold all necessary licenses to legally sell ammunition in the U.S.
In recent years, federal and state legislatures have increased their attention on the regulation of firearms and ammunition. The bills proposed to date are extremely varied and include, without limitation, laws and court decisions allowing causes of action against marketers and sellers of firearms and ammunition arising out of the criminal misuse of their products. If enacted, such legislation could effectively ban or severely limit the sale of certain categories of firearms, which would negatively impact sales of our related ammunition products. We cannot be assured that the regulation of our business activities will not become more restrictive in the future and that any such restrictions will not have a material adverse effect on our business.
Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation, as well as export controls and trade sanctions, could result in fines or criminal penalties.
The international nature of our business exposes us to trade sanctions and other restrictions imposed by the U.S. and other governments. The U.S. Departments of Justice, Commerce, Treasury and other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of the Foreign Corrupt Practices Act ("FCPA"), export controls, anti-boycott provisions and other federal statutes, sanctions, and regulations and, increasingly, similar or more restrictive foreign laws, rules and regulations, which may also apply to us. In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws and we expect the relevant agencies to continue to increase their enforcement efforts.
In foreign countries in which we have operations, a risk exists that our associates, contractors or agents could, in contravention of our policies, engage in business practices prohibited by U.S. laws and regulations applicable to us, such as the FCPA, or the laws and regulations of other countries, such as the UK Bribery Act. We maintain a policy, Code of Business Ethics, prohibiting such business practices. Nevertheless, we remain subject to the risk that one or more of our associates, contractors or agents, including those based in or from countries where practices that violate such U.S. laws and regulations or the laws and regulations of other countries may be customary, will engage in business practices that are prohibited by our policies, circumvent our compliance programs and, by doing so, violate such laws and regulations. Any such violations, even if prohibited by our internal policies, could adversely affect our business or financial performance and our reputation.
By virtue of these laws and regulations we may be obliged to limit our business activities, we may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance. A violation of these laws, sanctions or regulations could result in restrictions on our exports, civil and criminal fines or penalties and could adversely impact our business, financial condition or results of operations.
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If our efforts to protect the security of personal information about our customers and consumers are unsuccessful and unauthorized access to that personal information is obtained, or we experience a significant disruption in our computer systems or a cybersecurity breach, we could experience an adverse effect on our operations, we could be subject to costly government enforcement action and private litigation and our reputation could suffer.
Our operations, especially our retail operations, involve the storage and transmission of our customers’ and consumers’ proprietary information, such as credit card and bank account numbers, and security breaches could expose us to a risk of loss of this information, government enforcement action and litigation and possible liability. Our payment services may be susceptible to credit card and other payment fraud schemes, including unauthorized use of credit cards, debit cards or bank account information, identity theft or merchant fraud.
If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and as a result, someone obtains unauthorized access to our customers’ and consumers’ data, our reputation may be damaged, our business may suffer, and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs, the public perception of the effectiveness of our security measures could be harmed and we could lose customers and consumers, which could adversely affect our business.
We also rely extensively on our computer systems to manage our ordering, pricing, inventory replenishment and other processes. Our systems could be subject to damage or interruption from various sources, including power outages, computer and telecommunications failures, computer viruses, cyber security breaches, vandalism, severe weather conditions, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities. If our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and we may experience loss of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business, financial condition or results of operations.
Risks Related to Macro-Economic Conditions
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
A portion of our indebtedness consists of revolver borrowings with variable rates of interest that expose us to interest rate risk. If interest rates increase, our debt service obligations on our variable rate indebtedness will increase even if the amount borrowed remains the same, and our net income and cash flows will correspondingly decrease. Assuming $170 million of variable-rate indebtedness (which was the amount of out indebtedness outstanding as of April 1,2022), a change of 1/8 of one percent in interest rates would result in a $0.2 million change in annual estimated interest expense. Even if we enter into additional interest rate swaps in the future in order to reduce future interest rate volatility, we may not fully mitigate our future interest rate risk.
Changes in U.S. and global trade policies, including new and potential tariffs on goods we import or on products we export to other countries, could increase our cost of goods or limit our access to export markets.
In recent years, protectionist trade policies have been increasing around the world, including in the U.S. It is unclear what additional tariffs, duties, border taxes or other similar assessments on imports might be implemented in the future and what effects these changes may have on retail markets or our operating performance. Additional protectionist trade legislation in either the U.S. or foreign countries, including changes in the current tariff structures, export or import compliance laws, or other trade policies, could reduce our ability to sell our products in foreign markets, the ability of foreign customers to purchase our products, and our ability to import components, parts, and products from foreign suppliers. In particular, increases in tariffs on goods imported into the U.S. could increase the cost to us of such merchandise (whether imported directly or indirectly) and cause increases in the prices at which we sell such merchandise to our customers, which could materially adversely affect the financial performance of our business.
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The global economy has been negatively impacted by the military conflict in Ukraine. Furthermore, governments in the U.S., United Kingdom, and European Union have each imposed export controls on certain products and financial and economic sanctions on certain industry sectors and parties in Russia. Although we have no operations in Russia or Ukraine, we may experience shortages in materials and increased costs for transportation, energy, and raw material due in part to the negative impact of the military conflict in Ukraine on the global economy. Further escalation of geopolitical tensions related to the military conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain. In addition, the effects of the ongoing conflict could heighten many of our known risks described in this Annual Report.
Our results of operations could be impacted by unanticipated changes in tax provisions or exposure to additional income tax liabilities.
Our business operates in many locations under government jurisdictions that impose income taxes. Changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain revenues or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. In addition, audits by income tax authorities could result in unanticipated increases in our income tax expense.
In particular, we are affected by the impact of changes to tax laws or related authoritative interpretations in the U.S., including tax reform under the 2017 Tax Cuts and Jobs Act (the '2017 Tax Act'), which includes broad and complex changes to the U.S. tax code, and the state tax response to the 2017 Tax Act, including, but not limited to variability in our future tax rate.
We may need to raise additional capital, and we cannot be sure that additional financing will be available.
We will need to fund our ongoing working capital, capital expenditures and financing requirements through cash flows from operations and new sources of financing. Our ability to obtain future financing will depend on, among other things, our financial condition and results of operations as well as on the condition of the capital markets or other credit markets at the time we seek financing. Increased volatility and disruptions in the financial markets, including as a result of natural disasters and public health crises or other significant catastrophic events, such as the global COVID-19 pandemic, or geopolitical events, such as the military conflict in Ukraine, could make it more difficult and more expensive for us to obtain financing. In addition, the pendency of the Planned Separation may adversely affect our ability to obtain financing. We cannot assure you that we will have access to the capital markets or other credit markets on terms we find acceptable or at all.
The terms of the agreements governing our debt restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industries in which we operate, the economy and governmental regulations.
Fluctuations in foreign currency exchange rates may adversely affect our financial results.
During the fiscal year ended March 31, 2022, approximately 14% of our revenue was generated from sales outside the U.S. Revenues from foreign operations (and the related expense) are often transacted in foreign currencies or valued based on a currency other than U.S. dollars. For the purposes of financial reporting, this revenue is translated into U.S. dollars. Resulting gains and losses from foreign currency fluctuations are therefore included in our consolidated financial statements. As a result, when the U.S. dollar strengthens against certain foreign currencies, including the Euro, British pound sterling, Canadian dollar, and other major currencies, our reportable revenue in U.S. dollars generated from sales made in foreign currencies may decrease substantially. As a result, we are exposed to foreign currency exchange rate fluctuations, which could have an adverse effect on our financial condition, results of operations and cash flows.
General economic conditions affect our results of operations.
Our revenues are affected by economic conditions and consumer confidence worldwide, but especially in the U.S. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products. Moreover, our businesses are cyclical in nature, and their success is impacted by general economic conditions and specific economic conditions affecting the regions and markets we serve, the overall level of consumer confidence in the economy and discretionary income levels. Any substantial deterioration in general economic conditions, including as a result of the COVID-19 pandemic or the military conflict in Ukraine, that diminishes consumer confidence or discretionary income could reduce our sales and adversely affect our financial results. Moreover, declining economic conditions create the potential for future impairments of goodwill and other intangible and long-lived assets that may negatively impact our financial condition or results of operations. The impact of weak consumer credit markets, corporate restructurings, layoffs, high unemployment rates, declines in the value of investments and residential real estate, higher fuel prices and increases in federal and state taxation can also negatively affect our results of operations.
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In addition, in recent periods sluggish economies and consumer uncertainty regarding future economic prospects in our key markets have had an adverse effect on the financial health of certain of our customers, which may in turn have a material adverse effect on our results of operations and financial condition. We extend credit to our customers for periods of varying duration based on an assessment of the customer’s financial condition, generally without requiring collateral, which increases our exposure to the risk of uncollectible receivables. In addition, we face increased risk of order reduction or cancellation when dealing with financially ailing retailers or retailers struggling with economic uncertainty. Our risk of uncollectible receivables and order cancellations has recently been elevated as a result of retail store closures in many locations as a result of the COVID-19 pandemic, which has adversely affected many of our customers. We may reduce our level of business with customers and distributors experiencing financial difficulties and may not be able to replace that business with other customers, which could have a material adverse effect on our financial condition, results of operations or cash flows. In times of uncertain economic conditions there is also increased risk that inventories may not be liquidated in an efficient manner and may result in us having excess levels of inventory.
Risks Related to Our Common Stock and Indebtedness
Our debt covenants may limit our ability to complete acquisitions, incur debt, make investments, sell assets, merge or complete other significant transactions.
Our 2021 ABL Revolving Credit Facility contains a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries and limits our ability to engage in actions that may be in our long-term best interests, including restrictions on our, and our subsidiaries', ability to:
•incur or guarantee additional indebtedness or sell disqualified or preferred stock;
•pay dividends on, make distributions in respect of, repurchase or redeem, capital stock;
•make investments or acquisitions;
•sell, transfer or otherwise dispose of certain assets;
•create liens;
•enter into sale/leaseback transactions;
•enter into agreements restricting the ability to pay dividends or make other intercompany transfers;
•consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries' assets;
•enter into transactions with affiliates;
•prepay, repurchase or redeem certain kinds of indebtedness;
•issue or sell stock of our subsidiaries; and
•significantly change the nature of our business.
The indenture governing our 4.5% Notes also contains many of these same restrictions. As a result of all of these restrictions, we may be:
•limited in how we conduct our business and pursue our strategy;
•unable to raise additional debt financing that we may require to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
A failure to comply with the covenants in the 2021 ABL Revolving Credit Facility could result in an event of default under the 2021 ABL Revolving Credit Facility, which could allow our creditors to accelerate the related indebtedness and proceed against the collateral that secures such indebtedness. Similarly, a failure to comply with the covenants in the indenture governing our 4.5% Notes could result in an event of default thereunder, which could allow the holders of the 4.5% Notes to accelerate such notes. The 2021 ABL Revolving Credit Facility and the indenture governing the 4.5% Notes contain cross-default provisions so that noncompliance with the covenants of any of our other debt agreements could cause a default under these debt agreements as well. In the event our creditors accelerate the repayment of our borrowings, we may not have sufficient liquidity to repay our indebtedness.
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In the event that we incur additional indebtedness in connection with the Planned Separation, we expect that such indebtedness will also include restrictive covenants similar to those described above. See “Risks Related to our Planned Separation—We may incur additional indebtedness in connection with the Planned Separation, and such additional indebtedness could adversely impact our business, financial condition or results of operations.”
Provisions of our Amended and Restated Certificate of Incorporation, our Amended and Restated Bylaws, and Delaware law may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.
Several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and Delaware law may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable. These include provisions that:
•allow our Board of Directors to authorize for issuance, without stockholder approval, preferred stock, the rights of which will be determined at the discretion of the Board of Directors and, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that our Board of Directors does not approve;
•prohibit our stockholders from taking action by written consent and require that stockholder action must take place at a duly called annual or special meeting of our stockholders;
•establish how stockholders may present proposals or nominate directors for election at meetings of our stockholders;
•mandate that stockholders may only remove directors for cause;
•grant exclusive privilege (subject to certain limited exceptions) to our directors, and not our stockholders, to fill vacancies on our Board of Directors;
•provide that only our Board of Directors, Chairman of our Board of Directors, our Chief Executive Officer or the President (in the absence of the Chief Executive Officer) are entitled to call a special meeting of our stockholders; and
•limit our ability to enter into business combination transactions with certain stockholders.
These and other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and Delaware law may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of us, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price.
Risks Related to our Planned Separation
The Planned Separation of our Outdoor Products and Sporting Products segments into two independent, publicly-traded companies is subject to various risks, uncertainties and conditions and may not be completed in accordance with the expected plan or at all.
On May 5, 2022, we announced that our Board of Directors unanimously approved a plan to separate our Outdoor Products and Sporting Products segments into two independent, publicly-traded companies via a spin-off of our Outdoor Products segment. The Planned Separation is subject to final approval of the terms of the transaction by our Board of Directors and other customary conditions, including, among other things, the receipt of a tax opinion from tax advisors concerning the tax-free nature of the transaction for U.S. federal income tax purposes, the effectiveness of a Form 10 registration statement that Outdoor Products SpinCo will file with the SEC, approval of listing of the common stock of Outdoor Products SpinCo on the stock exchange chosen for the listing of such common stock and no other event or development existing or having occurred that our Board of Directors determines, in its sole and absolute discretion, makes it inadvisable to effect the Planned Separation or related transactions. The Planned Separation is complex in nature, and unanticipated developments or changes, including changes in the law, the macroeconomic environment, competitive conditions of our markets, approvals or consents that we may seek, the uncertainty of the financial markets, and challenges in executing the necessary transactions, could delay or prevent the completion of the Planned Separation, or cause the Planned Separation to occur on terms or conditions that are different or less favorable than expected.
While we are pursuing the Planned Separation, and whether or not the transaction is completed, our ongoing businesses may be adversely affected, including as a result of one or more of the following:
•the diversion of our management’s attention from operating and growing our business as a result of the significant amount of our management’s time and effort required to execute the Planned Separation;
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•foreseen and unforeseen costs and expenses that will be incurred in connection with the Planned Separation, including accounting, tax, legal and other professional services costs;
•challenges in separating our businesses, including separating the assets and liabilities, infrastructure and personnel of these businesses, potentially resulting in delays and additional costs in achieving the completion of the Planned Separation;
•disruptions to and potential adverse impacts on our relationships with our suppliers, customers and others with whom we do business;
•challenges in establishing the desired capital structure for the two businesses, including challenges accessing the financial markets;
•uncertainty among our key employees concerning their future with us or with Outdoor Products SpinCo, leading to potential distraction, as well as potential difficulty in attracting, retaining or motivating key employees during the pendency of the Planned Separation and following its planned completion;
•potential adverse impact on our credit ratings; and
•potential negative reactions from the financial markets if we fail to complete the Planned Separation as currently expected, within the anticipated time frame or at all.
The completion of the Planned Separation may not achieve some or all of the intended benefits and may adversely affect our business.
Even if the Planned Separation is completed, we may not realize some or all of the intended benefits from the separation of our businesses, and the Planned Separation may adversely affect our business. A spin-off of our Outdoor Products segment will result in us being a smaller, less diversified company, making us more vulnerable to changing market and economic conditions. Our Sporting Products business will be more concentrated in ammunition products, and we will have greater exposure to legal, regulatory, political and other risks relating to the ammunition industry. In addition, as a smaller company, our ability to absorb costs may be negatively impacted, and we may be unable to obtain financings, goods or services at prices or on terms that are as favorable as those obtained by us prior to the Planned Separation. Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows, business prospects and the trading price of our common stock. We cannot assure you that the combined value of the common stock of the two publicly traded companies following the completion of the Planned Separation will be equal to or greater than what the value of our common stock would have been had the Planned Separation not occurred.
The Planned Separation may have an adverse effect on the price of our common stock.
The changes in our operational and financial profile resulting from the Planned Separation may not meet some or all of our stockholders’ investment strategies, which could cause investors to sell their shares and otherwise decrease demand for shares of our common stock. Sales of our common stock could cause the market price of our common stock to decrease, and the market price of our common stock may be subject to greater volatility following the completion of the Planned Separation.
The Planned Separation and related transactions may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal distribution requirements.
The Planned Separation could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor could claim that we did not receive fair consideration or reasonably equivalent value in the Planned Separation, and that the Planned Separation left us insolvent or with unreasonably small capital or that we intended or believed we would incur debts beyond our ability to pay such debts as they mature. If a court were to agree with such a plaintiff, then such court could void the Planned Separation as a fraudulent transfer and could impose a number of different remedies, including returning the assets or the shares of Outdoor Products SpinCo common stock or providing us with a claim for money damages against Outdoor Products SpinCo in an amount equal to the difference between the consideration received by us and the fair market value of Outdoor Products SpinCo at the time of the Planned Separation.
The Planned Separation could result in significant tax liability to the Company and its stockholders, and tax rules could limit our ability to enter into certain transactions for a period of time following the Planned Separation.
The distribution of shares of Outdoor Products SpinCo to our stockholders in the Planned Separation is expected to qualify as tax-free under Section 355 of the U.S. Internal Revenue Code. We intend to obtain an opinion from our tax advisors as to the tax-free nature of the Planned Separation. This opinion will be based on, among other things, various factual assumptions and representations by us and Outdoor Products SpinCo regarding the past and future conduct of the companies’
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respective businesses and other matters. If any of these assumptions or representations are, or become, inaccurate or incomplete, reliance on the tax opinion may be jeopardized. The opinion will not be binding on the Internal Revenue Service (the “IRS”), and it is possible that the IRS will take a contrary position. If the IRS determined on audit that the distribution is taxable, both we and our stockholders could incur significant U.S. federal income tax liabilities.
In addition, following the Planned Separation, compliance with the requirements for a tax-free spin-off under Section 355 of the Internal Revenue Code may limit our ability to enter into certain transactions that would otherwise be advantageous to us. For example, transactions such as share repurchases, certain major asset dispositions, and business combination and other strategic transactions with other businesses involving the issuance or acquisition of our stock may in some cases cause the Planned Separation to become taxable if undertaken within a period of time following the completion of the Planned Separation. As a result, we may determine to limit or forgo entirely such transactions in order to maintain the tax-free status of the Planned Separation.
We may incur additional indebtedness in connection with the Planned Separation, which could adversely impact our liquidity and strategic flexibility.
In connection with the Planned Separation, we may incur additional indebtedness, which may include, among other things, borrowings under credit facilities or the issuance of debt securities in one or more public or private offerings. Our target capital structure for the Company, following the completion of the Planned Separation, includes a target leverage level of up to 3.0 times EBITDA, although we cannot assure you that additional indebtedness will be available on terms we find acceptable or at all. Any such additional indebtedness would require a portion of our cash flow to be allocated to debt service payments instead of other business purposes, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions and other general corporate purposes. Furthermore, any such additional indebtedness could impose operating and financial restrictions on us that limit our growth and the implementation of our business strategy. See “Risks related to our common stock and indebtedness—Our debt covenants may limit our ability to complete acquisitions, incur debt, make investments, sell assets, merge or complete other significant transactions.”
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Facilities—As of March 31, 2022, we occupied manufacturing, assembly, warehouse, test, research, development, and office facilities. All our facilities are leased unless noted otherwise below.
As of March 31, 2022, our segments had significant operations at the following locations, which include office, manufacturing, and distribution facilities:
| Sporting Products | *Lewiston, ID, *Anoka, MN; *Lonoke, AR; Sweet Home, OR | |||||||
| Outdoor Products | Petaluma, CA; Scotts Valley, CA; Rantoul, IL; Hyde Park; UT , Overland Park, KS; Olathe, KS, Monticello, MS; Manhattan, MT; Lares, PR; *Oroville, CA; Bozeman, MT; Eagle, CO; San Diego, CA; Mountain View, AR; Seymour, MO | |||||||
| Corporate | Anoka, MN | |||||||
| * denotes owned properties | ||||||||
Our properties are well maintained and in good operating condition and are sufficient to meet our near-term operating requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of our business. 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, we may be required to pay a share of the costs of the investigation and clean-up of these sites. While uncertainties exist with respect to the amounts and timing of our ultimate environmental liabilities, based on currently available
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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.
The description of certain of these environmental matters is contained in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading, Contingencies, and is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES (Amount in thousands except price per share)
Vista Outdoor's common stock is listed and traded on the New York Stock Exchange under the symbol "VSTO".
The number of holders of record of Vista Outdoor's common stock as of May 16, 2022 was 2,963.
Equity Compensation Plan Information
See Part III, Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, which is incorporated by reference herein for information regarding our equity compensation plans.
Recent Sales of Unregistered Securities
None
Issuer Repurchases of Equity Securities
On May 6, 2021, we announced that the Board of Directors authorized a share repurchase program (the "2021 Share Repurchase Program") pursuant to which we may repurchase up to $100,000 of our common stock. There will be no remaining shares repurchased under the 2021 Share Repurchase Program.
On February 3, 2022, we announced that the Board of Directors authorized an additional two-year share repurchase program (the "2022 Share Repurchase Program") pursuant to which we may repurchase up to $200,000 of our common stock. The 2022 Share Repurchase Program expires on January 24, 2024.
The combined amounts under both of these repurchase programs are currently well below the covenants in our 2021 ABL Revolving Credit Facility that limit our share repurchases.
The following table summarizes our share repurchases under the 2021 and 2022 Share Repurchase Program during the fourth quarter of fiscal year 2022:
| Period | Total number of shares repurchased (1) | Average price paid per share (1) | Total number of shares repurchased as part of publicly announced plan or programs | Approximate number of shares that may yet be repurchased under the plan or programs (2) | ||||||||||||||||||||||
| December 27, 2021 - January 23, 2022 (3) | 359 | 39.51 | 337 | |||||||||||||||||||||||
| January 24, 2022 - February 20, 2022 (4) | 364 | 38.36 | 362 | |||||||||||||||||||||||
| February 21, 2022 - March 31, 2022 | 91 | 35.59 | — | |||||||||||||||||||||||
| Fiscal quarter ended March 31, 2022 | 814 | 38.56 | 699 | 5,214 | ||||||||||||||||||||||
(1) Included in the total number of shares repurchased and average price paid per share is 115 shares withheld to pay taxes upon vesting of shares of restricted stock units, performance shares, or upon exercise of stock options, that were granted under our equity incentive plans.
(2) Since the inception of the programs through March 31, 2022, we repurchased 2,981 shares for $113,165 leaving approximately $186,105 remaining to be purchased. The shares were purchased from time to time in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. The repurchase authorization also allowed us to make repurchases under Rule 10b5-1 of the Securities Exchange Act of 1934. The approximate number of shares that may yet be repurchased under the 2022 Share Repurchase program was calculated using the Vista Outdoor closing stock price of $35.69 per share on March 31, 2022.
(3) Share repurchases under the 2021 Share Repurchase Program.
(4) Share repurchases under the 2022 Share Repurchase Program.
Stockholder Return Performance Graph
The following graph compares, from March 31, 2017 through the March 31, 2022 fiscal year end, the cumulative total return for our common stock with the comparable cumulative total return of two indexes: the Standard & Poor’s 500 Index
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(“S&P 500”) and the Standard & Poor’s 600 Smallcap Index (“S&P 600”). The S&P 500 tracks the aggregate price performance of equity securities of 500 large-cap companies that are actively traded in the U.S., and is considered to be a leading indicator of U.S. equity securities. The S&P 600 is a market value-weighted index that tracks the aggregate price performance of equity securities from a broad range of small-cap stocks traded in the U.S.
The graph assumes that on March 31, 2017, $100 was invested in our common stock (at the closing price on that trading day) and in each of the indexes. The comparison assumes that all dividends, if any, were reinvested.
ITEM 6. RESERVED
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related notes appearing elsewhere in this Annual Report. This section and other sections of this Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See "Forward-Looking Statements" and Part I, Item 1A. "Risk Factors" included in this Annual Report.
(Dollar amounts in thousands except share and per share data or unless otherwise indicated)
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. In preparing the consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We review our estimates on an ongoing basis to ensure the estimates appropriately reflect changes in our business and the most recent information available.
We believe the critical accounting policies discussed below affect our most significant estimates and judgments used in the preparation of our consolidated financial statements. For a complete discussion of all our significant accounting policies, see Note 1, Significant Accounting Policies, to the consolidated financial statements in Part II, Item 8 of this Annual Report.
Revenue Recognition
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, firearms and ammunition excise tax, and other similar taxes are excluded from revenue.
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.
Inventories
Our inventories are valued at the lower of cost or net realizable value. We evaluate the quantities of inventory held against past and future demand and market conditions to determine excess or slow-moving inventory. For each product category, we estimate the market value of the inventory comprising that category based on current and projected selling prices. If the projected market value is less than cost, we provide an allowance to reflect the lower value of the inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold. The projected market value of the inventory may decrease due to consumer preferences, legislative changes, or loss of key contracts among other events.
Income Taxes
Provisions for federal, state, and foreign income taxes are calculated based on reported pre-tax earnings and current tax law. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. We periodically assess our liabilities and contingencies for all periods that are currently open to examination or have not been effectively settled based on the most current available information. Where it is not more likely than not that our tax position will be sustained, we record the entire resulting tax liability and when it is more likely than not of being sustained, we record our best estimate of the resulting tax
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liability. As per our policy, any applicable interest and penalties related to these positions are also recorded in the consolidated financial statements. To the extent our assessment of the tax outcome of these matters changes, such change in estimate will impact the income tax provision in the period of the change.
Deferred tax assets are assessed to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Significant estimates are required for this analysis. If we determine it is not more likely than not that all of the deferred tax assets will be realized, a valuation allowance will be recorded. Changes in the amounts of valuation allowance are recorded in the tax provision in the period when the change occurs.
Accounting for goodwill and indefinite-lived intangibles
We test goodwill and indefinite lived intangible assets annually or upon the occurrence of events or changes in circumstances that indicate that the asset might be impaired.
We estimate fair value to assess the recoverability of our goodwill and indefinite lived intangible assets using a discounted cash flow model. Our assumptions used to develop the discounted cash flow analysis require us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital, and appropriate discount rates. The projections also take into account several factors including current and estimated economic trends and outlook, costs of raw materials and other factors that are beyond our control. If the current economic conditions were to deteriorate, or if we were to lose significant business, causing a reduction in estimated discounted cash flows, it is possible that the estimated fair value of certain reporting units or indefinite lived intangible assets could fall below their carrying value resulting in the necessity to conduct additional impairment tests in future periods. We continually monitor the reporting units and indefinite lived intangible assets for impairment indicators.
Business Combinations
We allocate the purchase price, including contingent consideration, of our acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their fair values at the date of acquisition. The fair values are primarily based on third-party valuations using our management assumptions that require significant judgments and estimates. The purchase price allocated to intangibles is based on unobservable factors, including but not limited to, projected revenues, expenses, customer attrition rates, royalty rates, a weighted average cost of capital, among others. The weighted average cost of capital uses a market participant’s cost of equity and after-tax cost of debt and reflects the risks inherent in the cash flows. The unobservable factors we use are based upon assumptions believed to be reasonable, but are also uncertain and unpredictable, as a result these estimates, and assumptions may require adjustment in the future if actual results differ from our estimates.
Contingent Consideration
Our approach to valuing the initial contingent consideration associated with the purchase price uses unobservable factors such as projected revenues and expenses over the term of the contingent earn-out period, discounted for the period over which the contingent consideration is measured, and volatility rates. Based upon these assumptions, the initial contingent consideration is then valued using a Monte Carlo simulation analysis in a risk-neutral framework. As of March 31, 2022, the contingent consideration liability consists of the estimated amounts due for earn-out payments from fiscal year 2023 through 2026. On a recurring basis, we adjust the contingent consideration liability to fair value based on the estimated probability of achieving the earn out targets and changes in any of the other Level 3 inputs above. To the extent our estimates change in the future regarding the likelihood of achieving these targets, we may need to record material adjustments to our contingent consideration liabilities.
See Note 1, Significant Accounting Policies, to the consolidated financial statements in Part II, Item 8 of this Annual Report, for discussion of new accounting pronouncements.
Executive Summary
Fiscal year 2022 record results and significant growth were supported by strong demand in the market for our portfolio of iconic brands, including the seven new brands acquired during the last two fiscal years.
Financial Highlights and Notable Events of fiscal year 2022
•Net sales increased $819,099 or 36.8%, over the prior fiscal year.
•Sporting Products net sales increased $618,137, or 55.2%.
•Outdoor Products net sales increased $200,962, or 18.2%.
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•Gross profit increased $476,272, or 75.2%, as compared to the prior fiscal year. Gross profit as a percentage of sales, increased to 36.4%, an increase of 799 basis points over the prior fiscal year.
•Sporting Products gross profit increased $399,930, or 128.1%.
•Outdoor Products gross profit increased $78,024, or 24.3%
•EBIT increased $361,264, or 126.8%, as compared to the prior fiscal year. EBIT as a percentage of sales increased to 21.2%, an increase of 842 basis points over the prior fiscal year.
•Fiscal year 2022 income was $473,226, or $8.00 per diluted share, an increase of $207,214, or $3.56 per diluted share over the prior fiscal year.
•We acquired QuietKat Inc. (QuietKat) during the first fiscal quarter of 2022, Foresight Sports (Foresight) and Fiber Energy Products (Fiber) during the third fiscal quarter of 2022, and Stone Glacier during the fourth fiscal quarter of 2022. See Note 7, Acquisitions and Divestitures, of the consolidated financial statements in Part II, Item 8 of this Annual Report, for a discussion of our acquisitions during fiscal year 2022.
•We repurchased 2,981 shares for a total of $113,165 during fiscal year 2022 under our 2021 Share Repurchase Program and our 2022 Share Repurchase Program. See Part II, Item 5 of this Annual Report, for details on our share repurchase programs.
•On May 5, 2022, we announced that our Board of Directors has unanimously approved preparations for the separation of our Outdoor Products and Sporting Products reportable segments into two independent, publicly-traded companies (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 the transaction will be completed in calendar year 2023, subject to final approval by our Board of Directors, a Form 10 registration statement being declared effective by the U.S. Securities and Exchange Commission, regulatory approvals and satisfaction of other conditions. There can be no assurance regarding the ultimate timing of the proposed transaction or that the transaction will be completed.
Outlook
Sporting Products Industry
Sales of hunting and shooting-sports related products, including ammunition, are heavily influenced by hunting and recreational shooting participation rates, civil unrest and the political environment. We believe that long-term participation trends support our expectation of continued increased demand for hunting and shooting-sports related products. Participation rates have remained strong, and we are seeing an expanded demographic of users. This broadened end consumer base has resulted in a much larger total addressable market opportunity for the industry and for our company. We believe we are well-positioned to succeed and capitalize on this demand given our scale and global operating platform, which we believe is particularly difficult to replicate in the highly regulated and capital-intensive ammunition manufacturing sector.
Outdoor Recreation Industry
We believe that long-term outdoor participation trends combined with a larger base of participants supports our expectation of continued increased demand for the innovative outdoor recreation-related products produced by our Outdoor Products brands. Participation rates have remained strong and we are seeing an expanded demographic within our end users. Our Outdoor Products brands hold a strong competitive position in the marketplace, and we intend to further differentiate our brands through focused research and development and marketing investments including increased use of social media and other digital marketing. Following significant investments in our brands’ e-commerce capabilities, both directly and through our E-Commerce Center of Excellence, we believe our brands are well-positioned to benefit from the ongoing shift in consumer shopping behavior to utilize online channels.
Results of Operations
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 our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following information should be read in conjunction with our consolidated financial statements included in this Annual Report.
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Fiscal Year 2022 Compared to Fiscal Year 2021
Our net sales, gross profit, gross profit as a percentage of net sales (gross profit margin), EBIT, EBIT as a percentage of net sales (EBIT margin), interest expense, and tax provision by reporting segment and by corporate and other (where applicable) are presented below (dollars in thousands):
| Years ended March 31, | Change | |||||||||||||||||||||||||
| Net Sales: | 2022 | 2021(1) | Dollars | Percent | ||||||||||||||||||||||
| Sporting Products | $ | 1,737,891 | $ | 1,119,754 | $ | 618,137 | 55.2 | % | ||||||||||||||||||
| Outdoor Products | 1,306,730 | 1,105,768 | 200,962 | 18.2 | % | |||||||||||||||||||||
| Total | $ | 3,044,621 | $ | 2,225,522 | $ | 819,099 | 36.8 | % | ||||||||||||||||||
(1) We modified the structure of our reportable segments during the third quarter of fiscal year 2022. Accordingly, prior period amounts have been reclassified to conform with the current period presentation. See Note 18, Operating Segment Information, to the consolidated financial statements in Part II, Item 8 of this Annual Report.
Sporting Products—The fiscal year 2022 period includes sales from Remington and HEVI-Shot, which we acquired in the third and fourth quarters, respectively, of the prior fiscal year. The increase also reflects improved pricing and strong demand in the market across our Sporting Products line, and production increases over the prior year at all of our facilities. These increases were partially offset by a reduction of sales from small rifle ammunition produced at the Lake City Army Ammunition Plant.
Outdoor Products—The increase in sales was driven by continued demand in the market for most of our categories, and was not restricted by retail store closures that impacted the prior year. The increase also reflects sales from businesses acquired in the current fiscal year. This was partially offset by a decline in our Outdoor Cooking business caused primarily by declining e-commerce sales as foot traffic returned to brick and mortar stores.
| Years ended March 31, | Change | |||||||||||||||||||||||||
| Gross Profit: | 2022 | 2021(1) | Dollars | Percent | ||||||||||||||||||||||
| Sporting Products | $ | 712,160 | $ | 312,230 | $ | 399,930 | 128.1 | % | ||||||||||||||||||
| Outdoor Products | 399,447 | 321,423 | 78,024 | 24.3 | % | |||||||||||||||||||||
| Corporate and other | (2,375) | (693) | (1,682) | (242.7) | % | |||||||||||||||||||||
| Total | $ | 1,109,232 | $ | 632,960 | $ | 476,272 | 75.2 | % | ||||||||||||||||||
| Gross profit margin | 36.4% | 28.4% | ||||||||||||||||||||||||
Sporting Products—The fiscal year 2022 period gross profit includes profits from Remington and HEVI-Shot, which we acquired in the third and fourth quarters, respectively, of the prior fiscal year. The increase also reflects improved pricing, sales volume and operating efficiencies. These increases were partially offset by increased commodity and input costs. Gross profit margin was 41.0% compared to 27.9% in the prior year.
Outdoor Products—The increase in gross profit was primarily driven by sales volume and operating efficiencies, partially offset by higher logistics costs, input costs, and sales channel mix. The increase also reflects gross profit from acquisitions that occurred during the current fiscal year. Gross profit margin was 30.6% compared to 29.1% in the prior year.
Corporate and Other—The decrease in corporate gross profit was due to inventory step-up expenses from acquisitions during the current year.
| Years ended March 31, | Change | |||||||||||||||||||||||||
| EBIT: | 2022 | 2021(1) | Dollars | Percent | ||||||||||||||||||||||
| Sporting Products | $ | 600,415 | $ | 222,713 | $ | 377,702 | 169.6 | % | ||||||||||||||||||
| Outdoor Products | 164,494 | 137,942 | 26,552 | 19.2 | % | |||||||||||||||||||||
| Corporate and other | (118,687) | (75,697) | (42,990) | (56.8) | % | |||||||||||||||||||||
| Total | $ | 646,222 | $ | 284,958 | $ | 361,264 | 126.8 | % | ||||||||||||||||||
| EBIT margin | 21.2% | 12.8% | ||||||||||||||||||||||||
Sporting Products—The increase in EBIT was primarily driven by the gross profit increase, partially offset by higher selling, general, and administrative expenses from the acquisitions of Remington and HEVI-Shot and higher selling and marketing expenses to support increased sales. EBIT margin was 34.5% compared to 19.9% in the prior year.
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Outdoor Products—The increase in EBIT was primarily driven by the gross profit increase, partially offset by increased selling, general, and administrative expenses from the current year acquisitions and investments in selling and marketing expenses to support increased sales and industry events, such as trade shows that returned this fiscal year. EBIT margin was 12.6% compared to 12.5% in the prior year.
Corporate and Other—The decrease in EBIT was primarily driven by the prior fiscal year pretax gain related to the divestiture of a non-strategic business in our Sporting Products segment. Additionally, the current fiscal year has higher share-based and incentive compensation expense, higher post-acquisition compensation, and investments in human capital which support our centers of excellence.
| Years ended March 31, | Change | |||||||||||||||||||||||||
| Interest expense, net: | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||
| Corporate and other | $ | 25,264 | $ | 25,574 | $ | (310) | (1.2) | % | ||||||||||||||||||
The decrease in interest expense was due to a decrease in debt issuance cost write-offs and a reduction in our interest rate on the 4.5% Notes, offset by an increase in our average debt balance.
| Years ended March 31, | ||||||||||||||||||||||||||||||||
| Income tax provision: | 2022 | Effective Rate | 2021 | Effective Rate | Change | |||||||||||||||||||||||||||
| Corporate and other | $ | (147,732) | 23.8 | % | $ | 6,628 | (2.6) | % | $ | (154,360) | ||||||||||||||||||||||
See Note 15, Income Taxes, to the consolidated financial statements in Part II, Item 8 of this Annual Report, for information regarding income taxes.
The increase in the current period tax rate is primarily due to the impact of the prior year decrease in the valuation allowance driven by earnings, the benefit of the loss carrybacks to prior profitable years as permitted under IRS regulations under the CAREs Act which permitted us to realize previously valued assets, and the release of the reserves for uncertain tax positions due to statute expiration in the prior year.
Our provision for income taxes includes federal, state and foreign income taxes. The effective tax rate for fiscal year 2022 of 23.8% differs from the federal statutory rate of 21% primarily due to the impact of state taxes and is partially offset by changes in tax contingency.
The effective tax rate for fiscal year 2021 of (2.6)% differs from the federal statutory rate of 21% primarily due to the impact of the decrease in the valuation allowance, the release of uncertain tax positions, and the impact of the CAREs Act.
As of March 31, 2022 and 2021, the total amount of unrecognized tax benefits was $24,719 and $23,000, respectively, of which $21,139 and $20,283, respectively, would affect the effective tax rate, if recognized. The remaining balance is related to deferred tax items which only impact the timing of tax payments. Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $3,419 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $2,753. See Note 15, Income Taxes, to the consolidated financial statements included in this Annual Report for further details.
Fiscal Year 2021 Compared to Fiscal Year 2020
Our net sales, gross profit, gross profit as a percentage of net sales (gross profit margin), EBIT, EBIT as a percentage of net sales (EBIT margin), interest expense, and tax provision by reporting segment and by corporate and other (where applicable) are presented below (dollars in thousands):
| Years ended March 31, | Change | |||||||||||||||||||||||||
| Net Sales: | 2021(1) | 2020(1) | Dollars | Percent | ||||||||||||||||||||||
| Sporting Products | $ | 1,119,754 | $ | 871,550 | $ | 248,204 | 28.5 | % | ||||||||||||||||||
| Outdoor Products | 1,105,768 | 884,321 | 221,447 | 25.0 | % | |||||||||||||||||||||
| Total | $ | 2,225,522 | $ | 1,755,871 | $ | 469,651 | 26.7 | % | ||||||||||||||||||
(1) We modified the structure of our reportable segments during the third quarter of fiscal year 2022. Accordingly, prior period amounts have been reclassified to conform with the current period presentation. See Note 18, Operating Segment Information, to the consolidated financial statements in Part II, Item 8 of this Annual Report.
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Sporting Products—The increase in sales was primarily driven by strong demand in the market across nearly all categories, and improved pricing. Acquisitions accounted for $44,583 of net sales in fiscal year 2021. These increases were partially offset by the sale of our Firearms Business in fiscal year 2020, which accounted for approximately $25,000 of net sales.
Outdoor Products—The increase in sales was driven by strong demand in our Outdoor Accessories, Action Sports, Outdoor Cooking, and Golf businesses. This strong demand was partially offset by retail store closures in our first quarter of fiscal year 2021 and continued supply chain interruptions.
| Years ended March 31, | Change | |||||||||||||||||||||||||
| Gross Profit: | 2021(1) | 2020(1) | Dollars | Percent | ||||||||||||||||||||||
| Sporting Products | $ | 312,230 | $ | 137,914 | $ | 174,316 | 126.4 | % | ||||||||||||||||||
| Outdoor Products | 321,423 | 222,372 | 99,051 | 44.5 | % | |||||||||||||||||||||
| Corporate and other | (693) | (1,520) | 827 | 54.4 | % | |||||||||||||||||||||
| Total | $ | 632,960 | $ | 358,766 | $ | 274,194 | 76.4 | % | ||||||||||||||||||
| Gross profit margin | 28.4% | 20.4% | ||||||||||||||||||||||||
Sporting Products—The increase in gross profit was primarily driven by sales volume and pricing as described above and operating efficiencies. These increases were partially offset by the sale of our Firearms Business in fiscal year 2020. Gross profit margin was 27.9% in fiscal year 2021, compared to 15.8% in the previous year.
Outdoor Products—The increase in our gross profit was primarily driven by sales volume as described above and strong direct-to-consumer sales, partially offset by increased shipping, tariff, and product costs. Gross profit margin was 29.1% in fiscal year 2021, compared to 25.1% in the previous year.
Corporate and Other—The increase in corporate gross profit was due to fiscal year 2020 business restructuring costs, partially offset by inventory step-up expenses during fiscal year 2021.
| Years ended March 31, | Change | |||||||||||||||||||||||||
| EBIT: | 2021(1) | 2020(1) | Dollars | Percent | ||||||||||||||||||||||
| Sporting Products | $ | 222,713 | $ | 66,898 | $ | 155,815 | 232.9 | % | ||||||||||||||||||
| Outdoor Products | 137,942 | 43,125 | 94,817 | 219.9 | % | |||||||||||||||||||||
| Corporate and other | (75,697) | (242,259) | 166,562 | 68.8 | % | |||||||||||||||||||||
| Total | $ | 284,958 | $ | (132,236) | $ | 417,194 | 315.5 | % | ||||||||||||||||||
| EBIT margin | 12.8% | (7.5)% | ||||||||||||||||||||||||
Sporting Products—The increase in EBIT was primarily driven by the gross profit increase as described above, decreased travel and trade show expenses due to the COVID-19 pandemic, benefits from fiscal year 2020 cost savings initiatives, partially offset by losses attributable to initial marketing and start-up costs at Remington, increased incentive compensation accruals and the sale of our Firearms Business in fiscal year 2020. EBIT margin was 19.9% in fiscal year 2021, compared to 7.7% in the previous year.
Outdoor Products—The increase in EBIT was primarily driven by the gross profit increase as described above, partially offset by increased incentive compensation accruals and higher selling and marketing costs. EBIT margin was 12.5% in fiscal year 2021, compared to 4.9% in the previous year.
Corporate and Other—The increase in EBIT was primarily driven by fiscal year 2020 goodwill and intangible impairment expenses of $155,588, pretax gain on divestiture of $18,467 in fiscal year 2021, fiscal year 2020 held for sale asset impairment of $9,429 in our Firearms business, and a reduction of fiscal year 2020 restructuring expenses. These were partially offset by higher incentive compensation accrual, the loss on extinguishment of debt and higher transaction and transition costs in the fiscal year 2021.
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, our sources of liquidity include committed credit facilities and access to the public debt and equity markets. We use our cash primarily to fund investments in our existing businesses and for debt payments, acquisitions, share repurchases, and other activities.
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Financial Condition
Cash decreased to $22,584 at March 31, 2022 from $243,265 at March 31, 2021, primarily due to cash paid for acquisitions and the repurchase of shares, partially offset by cash provided from our operating activities and proceeds from our ABL Revolving Credit Facility during the last twelve months.
Operating Activities
Net cash provided by operating activities decreased $27,063 from the prior fiscal year. The decrease was primarily driven by inventory purchases in the current fiscal year to position ourselves for future growth and to mitigate supply chain disruption risks caused by the COVID-19 pandemic, timing of accounts payable, and higher accounts receivable balances due to higher sales volume. These decreases were partially offset by net income.
Investing Activities
Cash used for investing activities increased $485,820 from the prior fiscal year. The current fiscal year cash usage was driven by the acquisition of businesses.
Financing Activities
Net cash provided by financing activities was $48,967 compared to a use of cash of $31,640 during the prior fiscal year. The increase was primarily driven by net proceeds from our ABL Revolving Credit Facility, partially offset by the decrease in the net cash received from the issuance of our 4.5% Notes and redemption of our 5.875% Notes in fiscal year 2021, and cash used for the repurchase of shares of $113,195 during fiscal year 2022.
Liquidity
In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, debt repayments, employee benefit obligations, share repurchases, and any strategic acquisitions. Our short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain production facilities and working capital requirements. Our debt service requirements over the next two years consist of required interest payments due under our 4.5% Notes and 2021 ABL Revolving Credit Facility.
Based on our current financial condition, management believes that our cash position, combined with anticipated generation of cash flows and the availability of funding, if needed, under our 2021 ABL Revolving Credit Facility, access to debt and equity markets, as well as other potential sources of funding including additional bank financing, will be adequate to fund future growth, to service our currently anticipated long-term debt obligations, make capital expenditures over the next 12 months and fund the 2022 Share Repurchase Program. As of March 31, 2022, based on the borrowing base less outstanding borrowings of $170,000, outstanding letters of credit of $16,791, less the minimum required borrowing base of $45,000, the amount available under the 2021 ABL Revolving Credit Facility was $218,209.
There can be no assurance that the cost or availability of future borrowings, if any, will not be materially impacted by capital market conditions, including any disruptions to capital markets as a result of the COVID-19 pandemic (including the emergence and spread of vaccine resistant coronavirus variants), the military conflict in Ukraine and imposition of sanctions on Russia, or our future financial condition and performance. Furthermore, because our 2021 ABL Revolving Credit Facility is secured in large part by receivables from our customers, a sustained deterioration in general economic conditions, including as a result of the COVID-19 pandemic (including the emergence and spread of vaccine resistant coronavirus variants) or the military conflict in Ukraine and imposition of sanctions on Russia, that adversely affects the creditworthiness of our customers could have a negative effect on our future available liquidity under the 2021 ABL Revolving Credit Facility.
Share Repurchases
As of March 31, 2022, there is $186,105 remaining under our $200,000 2022 Share Repurchase Program, which we intend to fund through the fourth fiscal quarter of 2024. Additional information regarding our share repurchases during fiscal year 2022 is presented in Part II, Item 5 of this Annual Report.
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Long-Term Debt and Credit Agreements
As of March 31, 2022, we had actual total indebtedness of $670,000, which consisted of the following:
| March 31, 2022 | ||||||||
| Credit Agreements: | ||||||||
| 2021 ABL Revolving Credit Facility | $ | 170,000 | ||||||
| 4.5% Senior Notes | 500,000 | |||||||
| Less: unamortized deferred financing costs | (3,886) | |||||||
| Carrying amount of long-term debt | $ | 666,114 | ||||||
Our total debt as a percentage of total capitalization (total debt and stockholders' equity) was 37% as of March 31, 2022.
See Note 13, Long-term Debt, to the consolidated financial statements in Part II, Item 8 of this Annual Report, for a detailed discussion of our indebtedness.
Material Cash Requirements
The following tables summarize our material cash requirements as of March 31, 2022:
| Material cash requirements by period | ||||||||||||||||||||||||||||||||
| Total | Less than 1 year | Years 2 - 3 | Years 4 - 5 | More than 5 years | ||||||||||||||||||||||||||||
| Long-term debt | $ | 670,000 | $ | — | $ | — | $ | 170,000 | $ | 500,000 | ||||||||||||||||||||||
| Interest on debt | 172,517 | 26,255 | 52,508 | 48,754 | 45,000 | |||||||||||||||||||||||||||
| Operating leases | 130,630 | 18,484 | 31,051 | 25,519 | 55,576 | |||||||||||||||||||||||||||
| Purchase commitments and other | 259,108 | 106,220 | 152,888 | — | — | |||||||||||||||||||||||||||
| Total | $ | 1,232,255 | $ | 150,959 | $ | 236,447 | $ | 244,273 | $ | 600,576 | ||||||||||||||||||||||
Payments for interest is based on outstanding debt as of March 31, 2022.
Pension benefit obligation has been excluded from the Contractual Obligations table (see Note 14, Employee Benefit Plans), to the consolidated financial statements in Part II, Item 8 of this Annual Report, for details on our required contributions to our pension trust.
The total liability for uncertain tax positions as of March 31, 2022 was approximately $24,719 (see Note 15, Income Taxes, to the consolidated financial statements in Part II, Item 8, of this Annual Report), none of which is expected to be paid within 12 months. We are unable to provide a reasonably reliable estimate of the timing of future payments relating to the non-current uncertain tax position obligations.
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
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available information, we do not currently expect that these potential liabilities, individually or in the aggregate, will have a material adverse effect on our operating results, financial condition, or cash flows.
We could incur substantial additional costs, including cleanup costs, resource restoration, fines, and penalties or third-party property damage or personal injury claims, as a result of violations or liabilities under environmental laws or non-compliance with environmental permits. While environmental laws and regulations have not had a material adverse effect on our operating results, financial condition, or cash flows in the past, and we have environmental management programs in place to mitigate these risks, it is difficult to predict whether they will have a material impact in the future.
See Note 16, Commitments and Contingencies, to the consolidated financial statements included in this Annual Report for additional information.
Dependence on Key Customers; Concentration of Credit
No customer contributed more than 10% of sales during fiscal years 2022 and 2021; however, Walmart accounted for approximately 13% of our total fiscal year 2020 sales. If a key customer fails to meet payment obligations, our operating results and financial condition could be adversely affected.
Inflation and Commodity Price Risk
We are exposed to inflationary factors such as increases in labor, supplier, logistics and overhead costs that may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses, if the selling prices of our products are not able to offset these increased costs. Additionally, inflation may potentially impact demand as consumers reduce discretionary spending. 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, the prices of commodity metals, such as copper, zinc, and lead continue to be volatile. These prices generally impact our Sporting Products Segment. See Note 4, Derivative Financial Instruments, to the consolidated financial statements included in this Annual Report for additional information.
We have a strategic sourcing, pricing and hedging strategy to mitigate risk from commodity price fluctuation. 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. A significant portion of our indebtedness consists of revolver borrowings with variable rates of interest that expose us to interest rate risk. If interest rates increase, our debt service obligations on our variable rate indebtedness will increase even if the amount borrowed remains the same, and our net income and cash flows will correspondingly decrease. Assuming $170 million of variable-rate indebtedness (which was the amount of out indebtedness outstanding as of April 1, 2022), a change of 1/8 of one percent in interest rates would result in a $0.2 million change in annual estimated interest expense. Our indebtedness as of April 1, 2021 did not include any outstanding variable debt. To mitigate the risks from interest rate exposure, we may enter into hedging transactions, mainly interest rate swaps, through derivative financial instruments that have been authorized pursuant to corporate policies. We may use derivatives to hedge certain interest rate, foreign currency exchange rate, and commodity price risks, but do not use derivative financial instruments for trading or other speculative purposes. Additional information regarding these financial instruments is contained in Note 2, Fair Value of Financial Instruments, to the audited consolidated financial statements included in this Annual Report. Our objective in managing exposure to changes in interest rates is to limit the impact of such changes on earnings and cash flow.
We measure market risk related to holdings of financial instruments based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in fair values, cash flows, and earnings based on a hypothetical change (increase and decrease) in interest rates. We used current market rates on the debt portfolio to perform the sensitivity analysis. Certain items such as lease contracts, insurance contracts, and obligations for pension and other postretirement benefits were not included in the analysis.
We conduct business through our subsidiaries in many different countries, and fluctuations in currency exchange rates could have a significant impact on the reported results of operations, which are presented in U.S. dollars. Cross-border transactions, both with external parties and intercompany relationships, result in increased exposure to foreign exchange effects. Accordingly, significant changes in currency exchange rates, particularly the Euro, the British pound, the Chinese renminbi (yuan), and the Canadian dollar, could cause fluctuations in the reported results of our businesses’ operations that could negatively affect our results of operations. To mitigate the risks from foreign currency exposure, we may enter into hedging transactions, mainly foreign currency forward contracts, through derivative financial instruments that have been authorized pursuant to corporate policies.
In addition, sales and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Vista Outdoor Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vista Outdoor Inc. and subsidiaries (the "Company") as of March 31, 2022 and 2021, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 24, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Acquisition – Forecast of Future Cash Flows for Certain Assets Acquired – Refer to Note 7 to the financial statements
Critical Audit Matter Description
On September 28, 2021, the Company acquired Foresight Sports for $471 million. The Company allocated the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values, which resulted in the Foresight tradename being recorded in the amount of $42.5 million and customer relationships of $69.1 million. The Company estimated the fair value of the tradename and customer relationships using an income approach which required management to make significant estimates and assumptions related to the forecasts of future sales and the discount rate. Changes in these assumptions could have a significant impact on the fair value.
We identified the fair value determination of acquired intangible assets, specifically the Foresight tradename and customer relationships, as a critical audit matter due to the significant estimates and assumptions required in determining the forecasts of future sales and the discount rate. There was a high degree of auditor judgment and an increased extent of effort, including the need to involve fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates related to the selection of the discount rate and forecasts of future sales.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to forecasts of future sales and the selection of the discount rate for the Foresight acquisition included the following, among others:
•We tested the effectiveness of internal controls over management’s valuation analysis, including those over the forecasts of future sales and selection of the discount rate.
•We inquired of appropriate individuals, both within and outside of finance, regarding the sales forecasts.
•We evaluated the reasonableness of management’s forecasts of sales by comparing the forecasts to:
–Historical sales and growth rates of the acquired entity, as well as order backlog as of the date of acquisition.
–Internal communications to management and the Board of Directors.
–Forecasted information included in analyst and industry reports for the Company, applicable market data, and certain of its peer companies.
–Evidence obtained in other areas of the audit, including retrospective reviews of post-acquisition financial results.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by:
–Testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculations.
–Comparing the discount rate to market data.
–Developing ranges of independent estimates and comparing those to the discount rate selected by management.
–Comparing the estimated weighted average return on assets, internal rate of return, and the discount rate used in the valuation models and evaluating whether they were consistent with each other.
/s/ Deloitte & Touche LLP
May 24, 2022
We have served as the Company’s auditor since 2014.
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VISTA OUTDOOR INC.
CONSOLIDATED BALANCE SHEETS
| March 31, | ||||||||||||||
| (Amounts in thousands except share data) | 2022 | 2021 | ||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Net receivables | ||||||||||||||
| Net inventories | ||||||||||||||
| Income tax receivable | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Net property, plant, and equipment | ||||||||||||||
| Operating lease assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Net intangible assets | ||||||||||||||
| Deferred charges and other non-current assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued compensation | ||||||||||||||
| Federal excise, use, and other taxes | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Deferred income tax liabilities | ||||||||||||||
| Long-term operating lease liabilities | ||||||||||||||
| Accrued pension and postemployment benefits | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Notes 13 and 16) | ||||||||||||||
Common stock—$ | ||||||||||||||
Authorized— | ||||||||||||||
Issued and outstanding— | ||||||||||||||
| Additional paid-in-capital | ||||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
Common stock in treasury, at cost— | ( | ( | ||||||||||||
| Total stockholders' equity | ||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||||||||
See Notes to the Consolidated Financial Statements.
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VISTA OUTDOOR INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Years ended March 31, | ||||||||||||||||||||
| (Amounts in thousands except per share data) | 2022 | 2021 | 2020 | |||||||||||||||||
| Sales, net | $ | $ | $ | |||||||||||||||||
| Cost of sales | ||||||||||||||||||||
| Gross profit | ||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development | ||||||||||||||||||||
| Selling, general, and administrative | ||||||||||||||||||||
| Impairment of goodwill and intangibles (Note 11) | ||||||||||||||||||||
| Impairment of held-for-sale assets (Notes 7) | ||||||||||||||||||||
Earnings (loss) before interest, income taxes, and other | ( | |||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Gain (loss) on divestitures (Note 7) | ( | |||||||||||||||||||
| Loss on extinguishment of debt (Note 13) | ( | |||||||||||||||||||
Earnings (loss) before interest and income taxes | ( | |||||||||||||||||||
| Interest expense, net | ( | ( | ( | |||||||||||||||||
| Earnings (loss) before income taxes | ( | |||||||||||||||||||
| Income tax (provision) benefit | ( | |||||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ||||||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||
| Basic | $ | $ | $ | ( | ||||||||||||||||
| Diluted | $ | $ | $ | ( | ||||||||||||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||||||||
| Basic | ||||||||||||||||||||
| Diluted | ||||||||||||||||||||
| Net income (loss) (from above) | $ | $ | $ | ( | ||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Pension and other postretirement benefit liabilities: | ||||||||||||||||||||
Reclassification of prior service credits for pension and postretirement benefit plans recorded to net income, net of tax benefit of $ | ( | ( | ( | |||||||||||||||||
Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income, net of tax expense of $( | ||||||||||||||||||||
Valuation adjustment for pension and postretirement benefit plans, net of tax benefit (expense) of $( | ( | |||||||||||||||||||
Change in derivative instruments, net of tax benefit (expense) of $ | ( | ( | ||||||||||||||||||
Reclassification of currency translation gains | ||||||||||||||||||||
| Change in cumulative translation adjustment | ( | ( | ||||||||||||||||||
| Total other comprehensive income (loss) | ( | |||||||||||||||||||
| Comprehensive income (loss) | $ | $ | $ | ( | ||||||||||||||||
See Notes to the Consolidated Financial Statements.
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VISTA OUTDOOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years ended March 31, | ||||||||||||||||||||
| (Amounts in thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Operating Activities | ||||||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ||||||||||||||||
| Adjustments to net income (loss) to arrive at cash provided by operating activities: | ||||||||||||||||||||
| Depreciation | ||||||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||||||
| Amortization of deferred financing costs | ||||||||||||||||||||
| Change in fair value of contingent consideration | ||||||||||||||||||||
| Impairment of held-for-sale assets | ||||||||||||||||||||
| Impairment of goodwill and intangibles (Note 11) | ||||||||||||||||||||
| (Gain) loss on sale of businesses (Note 7) | ( | |||||||||||||||||||
| Deferred income taxes | ( | ( | ||||||||||||||||||
| Loss (gain) on disposal of property, plant, and equipment | ( | |||||||||||||||||||
| Loss on extinguishment of debt | ||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||||||
| Net receivables | ( | |||||||||||||||||||
| Net inventories | ( | ( | ( | |||||||||||||||||
| Accounts payable | ( | ( | ||||||||||||||||||
| Accrued compensation | ||||||||||||||||||||
| Accrued income taxes | ( | ( | ( | |||||||||||||||||
| Federal excise, use, and other taxes | ( | |||||||||||||||||||
| Pension and other postretirement benefits | ( | ( | ( | |||||||||||||||||
| Other assets and liabilities | ( | ( | ||||||||||||||||||
| Cash provided by operating activities | ||||||||||||||||||||
| Investing Activities | ||||||||||||||||||||
| Capital expenditures | ( | ( | ( | |||||||||||||||||
| Proceeds from the sale of businesses | ||||||||||||||||||||
| Acquisition of businesses, net of cash received | ( | ( | ||||||||||||||||||
| Proceeds from the disposition of property, plant, and equipment | ||||||||||||||||||||
| Cash (used for) provided by investing activities | ( | ( | ||||||||||||||||||
| Financing Activities | ||||||||||||||||||||
| Borrowings on lines of credit | ||||||||||||||||||||
| Payments made on lines of credit | ( | ( | ( | |||||||||||||||||
| Proceeds from issuance of long-term debt | ||||||||||||||||||||
| Payments made on long-term debt | ( | ( | ||||||||||||||||||
| Payments made for debt issue costs and prepayment premiums | ( | ( | ( | |||||||||||||||||
| Early redemption of long-term debt | ( | |||||||||||||||||||
| Deferred payments for acquisitions | ( | |||||||||||||||||||
| Proceeds from exercise of stock options | ||||||||||||||||||||
| Purchase of treasury shares | ( | |||||||||||||||||||
| Payment of employee taxes related to vested stock awards | ( | |||||||||||||||||||