VISTA OUTDOOR INC. (Amounts in thousands except per share data and unless otherwise indicated)
Forward-Looking Information is Subject to Risk and Uncertainty
Some of the statements made and information contained in this report, excluding historical information, are "forward-looking statements," including those that discuss, among other things: our plans, objectives, expectations, intentions, strategies, goals, outlook or other non-historical matters; projections with respect to future revenues, income, earnings per share or other financial measures forVista Outdoor ; and the assumptions that underlie these matters. The words "believe," "expect," "anticipate," "intend," "aim," "should" and similar expressions are intended to identify such forward-looking statements. To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995. Numerous risks, uncertainties and other factors could cause our actual results to differ materially from the expectations described in such forward-looking statements, including the following:
•supplier capacity constraints, production or shipping disruptions or quality or price issues affecting our operating costs;
•the supply, availability and costs of raw materials and components;
•increases in commodity, energy, and production costs;
•seasonality and weather conditions;
•our ability to complete acquisitions, realize expected benefits from acquisitions and integrate acquired businesses;
•reductions in or unexpected changes in or our inability to accurately forecast demand for ammunition, accessories, or other outdoor sports and recreation products;
•disruption in the service or significant increase in the cost of our primary delivery and shipping services for our products and components or a significant disruption at shipping ports;
•risks associated with diversification into new international and commercial markets, including regulatory compliance;
•our ability to take advantage of growth opportunities in international and commercial markets;
•our ability to obtain and maintain licenses to third-party technology;
•our ability to attract and retain key personnel;
•disruptions caused by catastrophic events;
•risks associated with our sales to significant retail customers, including unexpected cancellations, delays, and other changes to purchase orders;
•our competitive environment;
•our ability to adapt our products to changes in technology, the marketplace and customer preferences, including our ability to respond to shifting preferences of the end consumer from brick and mortar retail to online retail;
•our ability to maintain and enhance brand recognition and reputation;
•others' use of social media to disseminate negative commentary about us, our products, and boycotts;
•the outcome of contingencies, including with respect to litigation and other proceedings relating to intellectual property, product liability, warranty liability, personal injury, and environmental remediation;
•our ability to comply with extensive federal, state and international laws, rules and regulations;
•changes in laws, rules and regulations relating to our business, such as federal and state ammunition regulations;
•risks associated with cybersecurity and other industrial and physical security threats;
•interest rate risk;
•changes in the current tariff structures;
•changes in tax rules or pronouncements;
•capital market volatility and the availability of financing;
•foreign currency exchange rates and fluctuations in those rates;
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•general economic and business conditions inthe United States and our markets outsidethe United States , including the war inUkraine and the imposition of sanctions onRussia , conditions affecting employment levels, consumer confidence and spending, conditions in the retail environment, and other economic conditions affecting demand for our products and the financial health of our customers; and
•risks related to our Planned Separation.
You are cautioned not to place undue reliance on any forward-looking statements we make. A more detailed description of risk factors that may affect our operating results can be found in Part 1, Item 1A, Risk Factors, of our Annual Report on Form 10-K for fiscal year 2022 and in the filings we make withSecurities and Exchange Commission (the "SEC") from time to time. We undertake no obligation to update any forward-looking statements, except as otherwise required by law.
Business and Products
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, 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, 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.
Reportable Segments and Products
We operate under eight operating segments, which have been aggregated into two reportable segments, Sporting Products and Outdoor Products.
•Our Sporting Products reportable segment designs, develops, distributes and manufactures ammunition, primers, components and related equipment and accessories and serves devoted hunters, recreational shooters, federal and local law enforcement agencies and the military. Ammunition products include pistol, rifle, rimfire, shotshell ammunition and primers. 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, anglers and golfers. Products from the businesses included in this reportable segment include sport optics and archery and hunting accessories, e-bikes, helmets, goggles and accessories for cycling, snow sports, motocross and power sports, pellet grills, cookware, pellets and camp stoves, hydration packs, water bottles, drinkware and coolers, launch monitors, laser rangefinders, GPS devices, golf simulators and other technology products, waders, sportswear, outerwear, footwear and fishing tools and accessories. 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, Giro and
•Our Cycling operating segment, which is comprised of our QuietKat business;
•Our Outdoor Cooking operating segment, which includes our
•Our Hydration operating segment, which is comprised of our CamelBak business;
•Our Golf operating segment, which includes our Bushnell Golf and Foresight businesses; and
•Our Fishing operating segment, which is comprised of our Simms Fishing business.
Planned Separation of Outdoor Products and Sporting Products
OnMay 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. 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 toU.S. shareholders forU.S. federal income tax purposes. We currently expect the transaction will be completed in calendar year 2023, subject to 25
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final approval by our Board of Directors, a Form 10 registration statement being declared effective by theU.S. Securities and Exchange Commission , our receipt of the necessary regulatory approvals and satisfaction of other conditions. There can be no assurance regarding the ultimate timing of the proposed transaction or that the transaction will be completed.
We expect that the Planned Separation will create a number of benefits for Outdoor Products and Sporting Products, including:
•Enhanced strategic focus with supporting resources: Each company will have enhanced strategic focus with resources to support its specific operational needs and growth drivers.
•Tailored capital allocation priorities: Each company will have a tailored capital allocation philosophy that is better suited to support its distinctive business model and long-term goals.
•Strengthened ability to attract and retain top talent: Each company will benefit from enhanced ability to attract and retain top talent that is ideally suited to execute its strategic and operational objectives.
•Compelling value for shareholders: Each company will present a differentiated and compelling investment opportunity based on its particular business model.
•Expanded strategic opportunities: Improved focus will allow Outdoor Products to further cement its reputation as the acquirer of choice through continued M&A in the outdoor recreation products marketplace and enable Sporting Products to secure attractive partnerships with other manufacturers.
Executive Summary
Financial highlights and notable events for the three months ended
•Net sales increased
• Sporting Products net sales decreased
• Outdoor Products net sales increased
•Gross profit decreased
• Sporting Products gross profit decreased
• Outdoor Products gross profit increased
•EBIT decreased$58,831 , or 30.8%, for the three months endedSeptember 25, 2022 as compared to the three months endedSeptember 26, 2021 . EBIT margin decreased to 16.9%, a decrease of 760 basis points over the comparable quarter last year. •Net income decreased to$93,455 , or$1.62 per diluted share, compared to net income of$139,540 , or$2.36 per diluted share for the comparable quarter last year. •OnAugust 5, 2022 , we entered into a new ABL Term Loan Facility (the "2022 ABL Revolving Credit Facility"), which replaced the 2021 ABL Revolving Credit Facility. The 2022 ABL Revolving Credit Facility is comprised of a$600,000 Revolving Credit Facility and an asset-backed Term Loan of$350,000 . See Note 13, Long-term Debt, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details.
•We acquired
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.
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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. Rising inflation and the absence of stimulus payments have had an impact on the opening price points of certain categories. However, outdoor participation trends and demand for premium price points remain strong across our brand portfolio. We believe that demand for our Outdoor Products is being temporarily impacted by higher inflation causing a contraction in disposable income. 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 ourE-Commerce Center of Excellence , we believe our brands are well-positioned to benefit from the ongoing shift in consumer shopping behavior to utilize online channels. This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on results of operations, our financial condition, liquidity, and certain other factors that may affect our future results. The following information should be read in conjunction with our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Results of Operations
Segment results for the three and six months ended
Our net sales, gross profit, and EBIT by reportable segment and by corporate and other (where applicable) are presented below (dollars in thousands):
Three months ended Change Six months ended Change
September 25, September 26, September 25, September 26,
Net Sales: 2022 2021 (1) Dollars Percent 2022 2021 (1)
Dollars Percent
Sporting Products $ 432,489 $ 450,193 $ (17,704) (3.9) % $ 943,116 $ 814,481 $ 128,635 15.8 %
Outdoor Products 349,189 328,267 20,922 6.4 % 641,174 626,891 14,283 2.3 %
Total net sales $ 781,678 $ 778,460 $ 3,218 0.4 % $ 1,584,290 $ 1,441,372 $ 142,918 9.9 %
Three months ended
(1) We modified the structure of our reportable segments during the third
quarter of fiscal 2022. Accordingly, prior period amounts have been reclassified
to conform with the current period presentation. See Note 17, Operating Segment
Information, to the condensed consolidated financial statements in Part I, Item
1 of this Quarterly Report on Form 10-Q for more details.
Sporting Products- The decrease in net sales was caused by lower levels of finished goods inventory available during the quarter due to high sales in the prior fiscal quarter, partially offset by improved pricing.
Outdoor Products- The increase in net sales was driven by businesses acquired in the last twelve months and pricing, partially offset by declines in our organic businesses, primarily caused by reduced purchasing from big box retailers.
Six months ended
Sporting Products- The increase in sales was driven by higher volume in nearly all categories and improved pricing.
Outdoor Products- The increase in sales was driven by businesses acquired in the last twelve months and pricing, partially offset by declines in our organic businesses, primarily caused by reduced purchasing from big box retailers.
Three months ended Change Six months ended Change
September 25, September 26, September 25, September 26,
Gross Profit: 2022 2021 (1) Dollars Percent 2022 2021 (1) Dollars Percent
Sporting Products $ 159,138 $ 202,601 $ (43,463) (21.5) % $ 360,100 $ 351,597 $ 8,503 2.4 %
Outdoor Products 106,771 96,320 10,451 10.9 % 199,279 189,135 10,144 5.4 %
Corporate and other (3,035) - (3,035) - % (3,035) $ (384) (2,651) - %
Total gross profit $ 262,874 $ 298,921 $ (36,047) (12.1) % $ 556,344 $ 540,348 $ 15,996 3.0 %
Gross profit margin 33.6% 38.4% 35.1% 37.5%
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Three months ended
Sporting Products-The decrease in gross profit was caused by increased commodity and freight costs, lower volume, and unfavorable mix. These decreases were partially offset by pricing. Gross profit margin was 36.8% compared to 45.0% in the prior year quarter. Outdoor Products-The increase in gross profit was primarily driven by volume from businesses acquired in the last twelve months. These increases were partially offset by organic business volume declines. Gross profit margin was 30.6% compared to 29.3% in the prior year quarter.
Corporate and Other-The decrease in corporate gross profit was due to inventory step-up expenses related to acquisitions completed in the second quarter of fiscal year 2023.
Six months ended
Sporting Products-The increase in gross profit was driven by sales volume and
improved pricing. These increases were partially offset by increased commodity
and freight costs. Gross profit margin was 38.2% compared to 43.2% in the prior
year period.
Outdoor Products-The increase in gross profit was primarily driven by volume
from businesses acquired in the last twelve months. These increases were
partially offset by organic business volume declines. Gross profit margin was
31.1% compared to 30.2% in the prior year period.
Corporate and Other-The decrease in corporate gross profit was due to inventory
step-up expenses related to acquisitions completed in the second quarter of
fiscal year 2023.
Three months ended Change Six months ended Change
September 25, September 26, September 25, September 26,
EBIT: 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Sporting Products $ 133,552 $ 175,519 $ (41,967) (23.9) % $ 309,638 $ 300,224 $ 9,414 3.1 %
Outdoor Products 30,471 42,724 (12,253) (28.7) % 58,157 85,669 (27,512) (32.1) %
Corporate and other (32,115) (27,504) (4,611) (16.8) % (63,462) (51,498) (11,964) (23.2) %
Total EBIT $ 131,908 $ 190,739 $ (58,831) (30.8) % $ 304,333 $ 334,395 $ (30,062) (9.0) %
EBIT margin 16.9% 24.5% 19.2% 23.2%
Three months ended
Sporting Products-The decrease in EBIT was primarily caused by the decreased gross profit. EBIT margin was 30.9% compared to 39.0% in the prior year quarter.
Outdoor Products-The decrease in EBIT was primarily caused by decreased gross profit in the organic businesses, as well as increased selling, general, and administrative costs related to the businesses acquired in the past twelve months. EBIT margin was 8.7% compared to 13.0% in the prior year quarter.
Corporate and Other-The decrease in EBIT was primarily caused by increased planned separation costs, and increased transaction and transition costs, partially offset by a decrease in the fair value of the contingent consideration liability.
Six months ended
Sporting Products-The increase in EBIT was primarily driven by the increase in gross profit. EBIT margin was 32.8% compared to 36.9% in the prior year period.
Outdoor Products-The decrease in EBIT was primarily caused by decreased gross profit in the organic businesses, as well as selling, general, and administrative costs related to the businesses acquired in the past twelve months. EBIT margin was 9.1% compared to 13.7% in the prior year period.
Corporate and Other-The decrease in EBIT was primarily caused by increased
planned separation costs, and increased transaction and transition costs,
partially offset by a decrease in the fair value of the contingent consideration
liability.
Three months ended Change Six months ended Change
September 25, September 26, September 25, September 26,
Interest expense, net: 2022 2021
Dollars Percent 2022 2021 Dollars Percent
Corporate and other $ 13,934 $ 5,929 $ 8,005 135.0 % $ 20,244 $ 11,607 $ 8,637 74.4 %
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For the three and six months endedSeptember 25, 2022 , the increase in interest expense is due to a higher average interest rate and debt balance, along with increased debt issuance cost associated with our debt refinancing. Three months ended Six months endedSeptember 25 , EffectiveSeptember 26 , EffectiveSeptember 25 , EffectiveSeptember 26 , Effective Income tax provision: 2022 Rate 2021 Rate $ Change 2022 Rate 2021 Rate $ Change Corporate and other$ (24,519) 20.8 %$ (45,270) 24.5 %$ 20,751 $ (64,619) 22.7 %$ (80,523) 24.9 %$ 15,904 See Note 15, Income Taxes, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details regarding income taxes. The decrease in the effective rate for both the three and six months endedSeptember 25, 2022 in relation to the comparable prior year periods is primarily driven by the non-taxable contingent consideration income in the current year and the impact of beneficial state tax law changes.
Financial condition
Cash increased to$66,065 atSeptember 25, 2022 compared to$22,584 atMarch 31, 2022 , primarily due to cash provided by operating activities and advances on the 2022 ABL Revolving Credit Facility and 2022 Term Loan, partially offset by payments for acquisitions completed in the second quarter of fiscal year 2022.
Operating Activities
Cash provided by operating activities increased by$88,222 in the six months endedSeptember 25, 2022 compared to the prior year period. Timing of payments by customers, payments for inventory, and post-acquisition compensation payments as compared to the prior year period all contributed to the increase. These increases were partially offset by timing of payments to vendors, and timing of income tax payments. Investing Activities
Cash used for investing activities increased by
Financing Activities Cash provided by financing activities increased by$685,455 for the six months endedSeptember 25, 2022 compared to the prior year period. The increase relates to proceeds from the 2022 ABL Revolving Credit Facility and 2022 Term Loan, partially offset by increased payments on our credit facilities and a reduction in the repurchase of treasury shares as compared to the prior year period.
Liquidity and Capital Resources
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, 2022 Term Loan and 2022 ABL Revolving Credit Facility, and principal pre-payments due under the 2022 Term Loan. Each of the 2022 ABL Revolving Credit Facility and the 2022 Term Loan includes a covenant that prohibits the spin-off of any line of business ofVista Outdoor or certain of its subsidiaries, including the expected separation of our Outdoor Products segment (the "Planned Separation"), and amendment of each such covenant will require the consent of all lenders under the applicable credit facility in order to permit the Planned Separation. We anticipate that each of the 2022 ABL Revolving Credit Facility and the 2022 Term Loan will be repaid or refinanced in full prior to or upon the consummation of the Planned Separation. Based on our current financial condition, management believes that our cash position, combined with anticipated generation of cash flows and the availability of funding, if needed, under our 2022 ABL Revolving Credit Facility, access to debt and equity markets, as well as other potential sources of funding including additional bank financing, will be adequate to fund future growth to service our currently anticipated long-term debt and pension obligations, make capital expenditures, and fund the 2022 Share Repurchase Program over the next 12 months. As ofSeptember 25, 2022 , based on the borrowing base less outstanding borrowings of$470,000 , outstanding letters of credit of$15,445 , and the minimum required borrowing base of$60,000 , the amount available under the 2022 ABL Revolving Credit Facility was$54,555 . Our total debt as a percentage of total capitalization (total debt and stockholders' equity) was 49.4% as ofSeptember 25, 2022 . 29
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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 caused by COVID-19 pandemic (including the emergence and spread of vaccine resistant coronavirus variants), the war inUkraine and imposition of sanctions onRussia , or our future financial condition and performance. Furthermore, because our 2022 ABL Revolving Credit Facility is secured in large part by receivables from our customers, a sustained deterioration in general economic conditions, including as a result of the COVID-19 pandemic (including the emergence and spread of vaccine resistant coronavirus variants) or the war inUkraine and imposition of sanctions onRussia , that adversely affects the creditworthiness of our customers could have a negative effect on our future available liquidity under the 2022 ABL Revolving Credit Facility
Additional information about our long-term debt is presented in Note 13, Long-term Debt, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details.
Contractual Obligations and Commitments
We leases certain warehouse, distribution and office facilities, vehicles and office equipment under operating leases. As ofSeptember 25, 2022 , current and long-term operating lease liabilities of$15,980 and$96,663 , respectively, were recorded in the accompanying condensed consolidated balance sheets. For further discussion on minimum lease payment obligations, see Note 3, Leases, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details. Except as discussed in Note 13, Long-term Debt, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and under Liquidity and Capital Resources above, there have been no material changes with respect to the contractual obligations and commitments or off-balance sheet arrangements described in our Annual Report on Form 10-K for fiscal year 2022. 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 investigations 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 potentially
responsible parties ("PRPs"), along with other parties, in regulatory agency
actions associated with hazardous waste sites. As a PRP, those former
subsidiaries may be required to pay a share of the costs of the investigation
and clean-up of these sites. In that event, we would be obligated to indemnify
those subsidiaries for those costs. While uncertainties exist with respect to
the amounts and timing of the ultimate environmental liabilities, based on
currently available information, we do not currently expect that these potential
liabilities, individually or in the aggregate, will have a material adverse
effect on our operating results, financial condition, or cash flows.
We could incur substantial additional costs, including cleanup costs, resource
restoration, fines, and penalties or third-party property damage or personal
injury claims, as a result of violations or liabilities under environmental laws
or non-compliance with environmental permits. While environmental laws and
regulations have not had a material adverse effect on 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.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Annual Report on Form 10-K for fiscal year 2022.
Dependence on Key Customers; Concentration of Credit
No single customer contributed 10% or more of our sales in the six months ended
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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 5, Derivative Financial Instruments, to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details. We 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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