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Good day, and welcome to the Vista Outdoor Q3 FY 2019 Earnings Conference Call. Today's conference is being recorded. Later we'll be taking questions. [Operator Instructions]
At this time, I'd like to turn the conference over to Rocky Krivijanski.
Thank you. Good morning, and thank you for joining us for our third quarter fiscal year 2019 earnings call. With me this morning are Chris Metz, Vista Outdoor's Chief Executive Officer; and Mick Lopez, our Senior Vice President and Chief Financial Officer.
Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Vista Outdoor and the industries in which we operate. We encourage you to review today's press release and Vista Outdoor's SEC filings for more information on these risk factors and uncertainties.
Please also note we have posted presentation materials on our Web site at vistaoutdoor.com, which supplement our comments this morning and include a reconciliation of non-GAAP financial measures.
With that said, I'll turn the call over to you, Chris.
Thank you, Rocky, and good morning everyone. We're sorry to not have Kelly Reisdorf, our Vice President of Investor Relations on the call with us this morning. Unfortunately, Kelly slipped on the ice this past weekend near her home in Minnesota and broke her ankle. However, she is well on her way to recovery, and you'll be hearing from her soon. And of course, she'll be with us on our next quarterly call.
I appreciate you all joining us today for our third quarter call. We're now three quarters into our portfolio reshaping, and we continue to see tremendous progress. We continue to deliver on our commitments quarter-over-quarter, and we remain focused on our transformation plan. There is a lot to report today, including continued headwinds within our business and the industry at large. But I want to start my remarks this morning by summarizing our progress in the quarter, primarily related to our transformation plan, and then offer more detail. At the end of the day, our transformation is the most important aspect of our business, and I'm confident it will provide the ongoing results we expect.
Our primary focus for the entire year is to reset our foundation, getting stronger as a company and crystallizing our long-term strategic plan for future success. To that end, we again made great strides in reshaping the company in the third quarter, including the following highlights. First, after successfully closing the divestiture of our eyewear brands and refinancing our existing credit facilities, we quickly launched into the sale process of our Savage brands. This has been a major focus for all of us this quarter. The process has been very competitive, and we are pleased with the current status of that transaction. I'll talk a bit more about this later, but I'm pleased to report that, as we forecasted, we expect to be in a position to make an announcement on this transaction before the end of the fiscal year.
Second, we continue to make great progress in creating a leaner and more focused SG&A structure. Through a combination of cost-cutting initiatives and restructuring, we're quickly building a better foundation for our company, which will support a more disciplined strategy for profitable growth in our core categories. Third, since our announcement last quarter that we entered into a sublease for our former corporate headquarters in Utah, we have now officially exited that facility, transferred our employees to other existing corporate locations, and considerably consolidated our corporate footprint by eliminating our most expensive piece of corporate real estate. Fourth, we delivered our first quarter of sequential quarterly growth in our organic gross profit rate, growing from 19.4% in Q2 to 20.2% in Q3.
Now, this might not sound like much on the surface, however when you take into account that our revenue fell 11% during the same period of time and the competitive pricing pressure we saw in Q3, this is no small fete. Our operations team has been laser-focused on reducing our input costs, reducing our indirect overhead, and leaning out our factories. And this is starting to pay dividends. Fifth, we announced last quarter that we hired a new senior executive to lead our ecommerce and digital initiatives. Ecommerce is one of our top corporate priorities, and a growth engine for future success. In just one quarter since announcing this critical hire, we're already seeing returns on that investment. We now have a new mission, vision, strategy, and go-forward plan to attach the ecommerce market across all of our brands.
In addition, as you may have seen in a public release we issued in December, we added a new member to our Board of Directors in the quarter, Mike Robinson, who brings an incredible breadth and dept of experience in ecommerce and digital marketing. Mike is a seasoned and highly respected retail executive, and we anticipate tapping into his extensive experience in ecommerce. As we have admitted before, we were late to the ecommerce game, but I'm more confident than ever that we now know how to win online, and we have created the right toolkit to make ecommerce a growth engine for Vista Outdoor in the future.
Finally, it was a great quarter for brand and product news. We just completed another successful winter show season with R3 Trade Association, Shotshell, PGA Show, and Winter Outdoor Retailer Show. Our brands launched scores of award-winning and innovative new products across these shows and the media, and importantly, our customers are excited about the contributions each will make to their revenues this coming year. I will provide more color on the brand and product highlights later in my remarks.
In summary, despite continued headwinds and challenges, we remain focused on driving profitability and cash flow across the organization. While revenue growth is something we all want and frankly expect to achieve in the near future, every decision we make is channeled towards our focus on EBIT, operating margin, and return on invested capital. I believe we have turned the corner, and are on a path to continue delivering consistent and incremental improvements to our profitability. It may likely take a few more quarters to begin to show sales growth. However, our company is now at a much better position to control our own destiny, enabling us to grow our profits, even in a challenging environment like we are facing today.
Let me know discuss in a bit more detail some of the results and more detailed accomplishments in this past quarter. From a results perspective, there are two focus areas that are positioning us for success, bottom line profitability and strengthening the balance sheet. I told you previously that these two areas will be our focus for this fiscal year, and we are demonstrating our ability to follow-through on that commitment.
First, we've made significant progress in our efforts to drive profitability this quarter. I'm proud of our EPS results, which demonstrate our commitment to profitability. In Q3, we have delivered our third straight quarter of sequential increases in earnings per share with EPS growing from breakeven in Q1 to $0.05 in Q2, and now $0.09 in Q3. We achieved our profitability growth in several ways. One of those was through cost reductions. Quite simply, we’ve ripped cost out of the business. This was a deliberate, intentional focus to reduce cost by eliminating unnecessary layers, waste, and redundancy. This is never easy, but we acted quickly and decisively, and we are delivering.
I believe in leading by example. This past calendar year, I personally spent 200 nights on the road getting to know our brands, businesses, and leaders much better. This gave me a much better perspective to allow us to thoughtfully make the deep cut that we've made and add some of the much-needed talent we now have, knowing that we'll be much stronger as a result. To put a final point on the areas we have cut is in the senior leadership team. The prior leadership team of this company had eight Senior Vice Presidents and Corporate, and today I have two. And now, the leaders of each of our major business units report directly to me. We are leaner, and more focused executive team, and we continue to push more accountability to our brands, driving faster and better decision-making.
In total, we have consistently improved our operating expenses over the past four quarters. We've reduced our SG&A each quarter since the fourth quarter of FY'18 with a total reduction of nearly 28% on an organic basis, and nearly 35% on an adjusted basis. Our cost structure will now enable us to grow our profits considerably as market conditions improve and our top line begins to grow.
I want to be clear, this is not just about cutting cost, this is about top-grading. At the same time, we've been reducing unnecessary spend, we've been adding talent in critical areas where we previously had none. And importantly, we've not reduced our R&D spending, and we continue to invest in new products for future growth. All of this is reflected in our current spend rate.
In addition to SG&A cuts, our operations and supply chain efficiency work continues to find significant savings in our business to help improve our gross profit, and we are just taping the surface. We've worked to optimize our sourcing practices and we just recently completed an initiative to consolidate packaging across many brands to realize additional cost savings.
To put a final point on the impact of our initiatives to improve our gross profits, our organic Q3 gross profit rate is flat to Q3 last year. Now, get on the surface, this might not sound like much until you consider that our organic sales are down 13% year-over-year. We are facing considerable year-over-year commodity headwinds, and the competitive pricing environment is worse year-over-year. Despite all of this, our year-over-year organic gross profit rate has remained flat. I'm proud of the efforts of our team and confident that this will result in increased gross profit rates as we move forward.
We’ve also instilled a new discipline within our business unit that we want profitable growth and not just growth. As part of this new discipline, any change in price must be pre-approved by the General Manager of the business unit, and our sales people are now incentivized on sales and profits, not just sales. In past years, we've focused on top line growth, which translated into sales at any cost. We've moved away from that mentality, instead are now committed to what I'll call good sales, which means increased profitability.
I should note that while we've walked away from sales opportunities that had no corresponding profits, we have continued to hold share in the majority of our categories. This is because many of these opportunities were simply quarter end deals that resulted in revenue timing shifts, we remain leaders in many categories across the industry, and especially in our core businesses. Knowing that maintaining our market share is a vital part of setting ourselves up for the successes -- for success as the market recovers.
While we still have more to accomplish. I can assure you that these profitability improvement actions I've just discussed are essential to positioning our company for success. These are the areas we can control today and we're taking advantage of them now. Moreover, I'm very proud of the lean and focus team I put on the field to go deliver these results.
The second element of focus we've delivered on again; this quarter is cleaning up and strengthening our balance sheet. We're doing that in several ways. One of which is the leverage is -- are the leveraging initiative that you're all familiar with. I'm proud of the progress we've made on that front. As you know, in the second quarter, we completed our eyewear sale and use the proceeds of that sale to pay down debt. And then, at the beginning of the third quarter, we refinanced our outstanding credit facilities.
This resulted in all of our debt extending to a five-year 2023 maturity date and better terms and more flexibility to continue with our turnaround plan and pursue growth opportunities in our core categories. Both of these actions have created a stronger and more flexible balance sheet for us. And now as we come toward the end of the fiscal year, we have the divestiture of savage within our sites where we had a deep and competitive field of bidders. And we'll have more to announce by the end of March. We're confident that once we sell savage and use the proceeds to further pay down debt, we will be in a much better situation and that will provide us with some additional options moving forward.
Finally, as you've seen in our release, a mix of both internal and external factors has resulted in our having to announce an intangible asset impairment charge. While, Mick will talk more about this in a few minutes, I would like to provide a little bit of context on this challenge.
Our impairment evaluation assessment was significantly impacted by the trading price of our common stock, higher prevailing interest rates and lower market multiples. Mick will discuss this in more detail. The impairment mostly affects our outdoor products portfolio. Continued market pressures in these units following a slower than expected holiday shopping season, combined with continuing retail bankruptcies and uncertainty around the impact of tariffs have resulted in a downward revision to sales projections for these units. This impairment is obviously disappointment, but I'm confident that the goodwill accounting hangover from Vista's past acquisitions is now over. We were absolutely on the right path with these businesses now, we brought in strong leaders who have built impressive teams and develop solid business plans. While we are belatedly paying the price for those earlier decisions, we move forward with the knowledge that better days are ahead.
As I said at the top of the call, we recognize the challenges in our industry that continue to impact our company and our brands. So let me take a minute to address the current industry and the external climate. The first and biggest obstacle that the entire sports and recreation industry continues to face is the market itself. I don't think this is a surprise for those of you who have been paying attention over the last several quarters, there are a number of factors contributing to the market challenges.
First, we've been facing continued softness in consumer demand for the past two years, particularly for hunting and shooting related products. This period of soft demand has persisted longer than any previous market cycle in recent history. As we've seen numerous times most typical correction cycles of last year between 12 and 18 months. We are currently at 24 months. There's simply no precedent for this trend. We like a lot of other folks in the industry, look at a whole series of data points.
Mixed checks, federal excise tax, point of sale data, consumer surveys to get a read on the market and whatever metric you choose, we see a continued challenge. Now realize the just released January next data shows a positive month, which we are thrilled to see. But we also know one month does not make a trend. And our ammunition business, POS data for ammo continues to be soft. By many accounts, the commercial market for ammunition has declined by as much as 20% to 30% over the past 24 months. However, our sales have declined less than this, and we believe we have held in some areas increased our share within the commercial market. More specifically in the commercial market, while we did see pockets of good news coming from our pistol business, our new waterfowl loads and our centerfire rifle and hunting ammunition, we continue to see decreased demand for our large volume 223556 in rimfire ammunition products as shooters continue to work through the stockpiles, they have amassed over the past several years.
Now many of you have asked about our business beyond our commercial business and ammunition, which is military and law enforcement businesses, where we are awesome market share leaders. These markets are longer term contract markets and we compete for these contracts all over the world. As you have seen for many of our public announcements, we continue to gain share in this market to strengthen our leadership position. In fact, we just won the Royal Canadian Mounted Police contract. The only pressure we see from this business segment is frankly, the 223556-product supplied by Lake City.
Unfortunately, Lake City is taking -- has taken a significant price increase, forcing us to either make significantly lower margins or walk away from certain business opportunities. We have chosen to walk away from business where we cannot make a decent profit, but should Lake City change their cost position, we see continued opportunities to grow in this segment.
The second market challenge we're seeing is that as our markets have declined, certain competitors have chosen to reduce pricing to unhealthy levels. These pricing decisions have resulted in some competitors either closing their doors or needing to reorganize themselves under the protection of bankruptcy. And some of these pricing decisions have also resulted in lower retail price and pricing and less margin dollars for both our retailers and our wholesalers. While we don't know with certainty, we do believe that a more disciplined approach to pricing will prevail as we go forward.
The third challenge we're seeing is the impact of lower demand and profits on our retail and wholesale partners, creating even more uncertainty in the market. This has manifested in multiple consolidations and bankruptcies, for key customers and distributors. We've also seen more cautious buying habits of our retail customers, resulting in lower inventory carrying levels and, in some cases, stock-outs on shelf. We've also seen some retailers hold-off on buying products due to the uncertainty surrounding tariffs on goods coming from China, while the tariffs themselves are on the whole, not a material impact to Vista. This uncertainty for retailers is impacting many of our brands. All of these issues are a play and affecting the environment in which we compete.
Now, despite all of the industry and external challenges we face, our brands put a lot of points on the board this quarter, and I believe are a harbinger from sales to come. First in our ammo business, our federal brand recently updated its packaging to better designate its premium category, and this change was very well received by media and customers at the SHOT Show in Las Vegas earlier this month.
In addition, several new ammo products were introduced to the SHOT Show, including the new blended heavyweight TSS, new options for Syntech and Valkyrie ammunition and our expansion into barns and burger game ammunition.
Additionally, federal's Hydra-Shok Deep won the 2019 ammunition of the Year award from shooting illustrated. In addition to these exciting new products, we've also introduced a new campaign we call BYOB, Bring Your Own Buckets and Bullets. The buckets come in 825 or 1375 rounds and bottles come in 250 or 450 round bottles, which are convenient because they fit in the cup holder of your vehicle. We've created these for the pistol and rimfire categories in both federal and CCI brands as another way to drive higher consumption with our consumers.
At CamelBak, December was the brand's largest e-commerce month in history. The brand also surpassed its highest January e-commerce numbers while they were still halfway through the month. Further, we see solid upside at CamelBak's newly launched custom bottles as they start to gain traction. This quarter we saw pre-most awarded the Golden Bullseye Award for our SurroundView blind from American hunter for year-over-year. The award will be officially presented in April, but we were notified at the end of December.
In our action sports Bell, Giro business unit we have officially taken over the number two market position in the United States for Giro snow goggle business. Our Giro Aether MIPS, which is the brand's new high-end road helmet has outpaced year-to-date sales budget expectations by 2 to 1 since launching in August. Aether has receive stellar reviews and one numerous year of the year awards perhaps most impressive Aether was the lead product in bicycle magazines year of the year feature and that publication is a larger cycling magazine in the world.
Bushnell introduced a brand-new golf laser rangefinder the Pro XE. This new rangefinder is the first in the industry to take into account such elements as elevation and barometric pressure. It was all the buzz at the recent PGA show in Orlando winning best in show from the golf channel and Golf Digest. Also Forbes named it their 10 best finds at the PGA show.
Finally, Camp Chef continues to be a great example for all our brands on the importance of influencers in this ever-expanding digital world. Camp Chef has been featured recently on the food network and is getting great reviews endorsements from celebrity chefs. They have some exciting new products and technology advancements at Camp Chef that are soon to be announced and we believe we will continue to lead the outdoor cooking industry. In total, I'm extremely proud of these great brands and their leadership teams who continue to make progress in a challenging environment.
Now when we announced our transformation plan, we said we're going to focus on improving our profitability reducing our cost and paying down our debt all of which would position us for success. We've made incredible progress on that plan in a short period of time while continuing to invest as much as ever in leadership new products. As we look to the final quarter of our fiscal year, you can count on us to continue to build on these portfolio shaping initiatives and I want to make clear that the future for us is not something we're waiting to plan we are confident that the remaining steps in our portfolio reshaping will be successful, and we have already started planning for the future.
During the third quarter of our fiscal year, I assemble my new leadership team for the sole purpose of starting to plan our growth strategy including discussing options for future acquisitions in our core categories. Creating a disciplined process for examining and defining natural adjacencies to our core and prioritizing the corporate initiatives that we believe will have the largest impact on our portfolio and how we will tackle them. We know that our future involves expanding our market leadership in our core categories both through acquisition and organic growth. And building further brand loyalty and capturing more market share through innovative new products.
We also know that building a robust e-commerce platform for all of our brands will be transformative to the entire business. We continue to make progress step-by-step and quarter by quarter. While we know there is still a long ways to go in many external forces to contend with we believe we have turned the corner and now have the tools to better control our own destiny and begin to grow our bottom line. I believe walking into Vista that there was tremendous potential and I remain confident that were on the right path. Thank you for being on today's earnings call and sticking with us as we continue to reshape our company.
With that I'll turn the remainder of the time over to Mick to discuss the financials.
Thank you, Chris, and good morning everyone. As Chris mentioned, we continue to make progress towards the completion of our transformation plan. On many external factors in this challenging environment have changed and shifted we remain committed to strengthening our brands for our customers and improving profitability for our shareholders. Our financial results reflect the expected progress we have made in delivering on our commitments in this transformational year.
First let's move on to the financial presentation on the website on to page three where we’ll start with the balance sheet. Here we can see clearly the major changes in regards to our success and portfolio rebalancing we closed the sale of our eyewear business in the second quarter and took the net proceeds of over $143 million to pay-down our debt. Now in anticipation of our sale of our savage firearms business given that we have entered into definitive negotiations we have classified it as held for sale. These are the first step in our strategy to focus on our core product category and pay-down debt.
The balance sheet also highlights major improvements for our capital structure with our new loans we affected in November. The asset backed loan structure for $450 million provides us reduced interest expense levels, flexibility to expanded growth, five year maturity and minimal restrictive covenants. We complemented this with $109 million term loan and a $40 million junior term loan. Both of these term loans are intended to be repaid upon sale of our firearms business.
From the time we began our transformation and restructuring journey, we have reduced a total net debt on our balance sheet by 28%. As of the third quarter, we have approximately $721 million in net debt on our balance sheet which will be $284 million of improvement from the time we began this journey in the second quarter of our fiscal year 2018. The substantial progress made is a the result of not only asset sales but the product of discipline working capital management and our ability to quickly respond to changing market conditions.
Upon completion of the Savage firearm sale our total debt reduction will be over $430 million or 42%. Our expected leverage ratio will be below five times leverage, which is in line with our credit ratings. Finally, the balance sheet shows this quarter and a major reduction of $546 million in asset value of goodwill, intangible assets, expected loss and held for sale firearms business and deferred tax assets. Breaking it down this consisted of $328 million impairment to goodwill a $102 million and in definite live trade names, 29 million impairment to deferred tax assets and 3 million in motorcycle intangibles.
These are related to our hunting, shooting accessories, outdoor recreation and in action sports units. Additionally, we took an $84 million permit related to an expected loss in accordance with the accounting rules for held for sale assets for savage firearms. After tax the total impairment charge was 504 million. This impairment was triggered by the significant decline in market cap during the third quarter as per the GAAP accounting guidelines. As we typically test goodwill once per year during our fourth quarter unless a triggering event occurs requiring is to test goodwill earlier.
Given the weaker-than-expected holiday shopping season, we then reduced our sales projections in our long-range financial plan. As you're aware the impairments are non-cash in nature and now align our equity value more closely to current market capitalization. We certainly do not expect any other major asset reductions unless there is a material deterioration of our markets. We provide much more detail on the impairment in our 10-Q which we’re filing today.
Let's move to the comprehensive income loss statements in next pages. As you can see our GAAP financial results of negative $8.94 earnings per share were affected mostly by $8.76 per share from the asset impairments we took. On a non-gap adjusted EPS basis, we see our third sequential quarter on quarter improvement in profitability as a result of productivity and restructuring efforts. We’re also pleased to have delivered on our commitment we’ve demonstrated three consecutive quarters of improvement to adjusted operating expenses.
Amidst an environment that has been managing through challenging input cost as well as pricing pressure a 22% year-over-year reduction to our adjusted operating expenses 12% on an organic basis reflects a consistent committed and disciplined level of execution within our company to winning in today's market. Starting with our corporate organization structure and real estate all the way to business unit expenditures and non-customer facing units we're continuing to drive our race.
Our cost-saving initiative underway is not only beginning to show its benefits in our financials but is beginning to transform the organizational culture of our company. We feel that the key to delivering a sustainable and successful cost management philosophy is by embedding in it in our company's culture.
Let’s move to the details on our financial results. As usual we have disclosed both as reported in adjusted results in our press release to assist you in your understanding the underlying numbers and to assist in comparison to prior periods. You'll find a more detailed financial presentation of our third quarter fiscal 2019 in our Web site. Our comments will focus on our adjusted results excluding the permit expenses just mentioned. I will discuss our results for the quarter for Vista Outdoor overall and I'll provide more color on the drivers within each of our segments.
Turning to slide four, the company reported third quarter sales of 468 million down 19.5% from the prior year quarter or down 13.1% on an organic basis. The year-over-year decrease reflects overall softening of demand in both our shooting sports and outdoor products segments. As mentioned by Chris we’re not only in a challenge market environment but further are focused on making good sales that deliver profitable revenue.
On a GAAP basis gross margin was 94 million for the quarter down from 126 million in the prior-year quarter. Third quarter adjusted gross profit was $97 million reflecting about 3 million in inventory adjustment for exited businesses. While the gross margin percentage was down approximately 97 basis points year-over-year the gross margin percentage was maintain quarter on quarter with a slight two basis point improvement.
On a GAAP basis operating expenses excluding the impairment were $93 million down 13.2% from the prior year quarter. Our adjusted operating expenses for the third quarter of 80 million down 22% from the prior-year quarter which is 12% down organically without eyewear sale. Excluding the expenses previously discussed the decline in operating expenses is a result of cost reduction actions taken both within our business segments and at the corporate level.
Interest expense for the current quarter was $60 million compared to 12.5 million in the prior-year quarter. The increase was due to write-off of cost associated with refinancing as well as higher borrowing rate in the current period partially offset by a lower average debt balance. The average borrowing rate in our third quarter was 5.9% compared with 4.5% in the prior year quarter. The average debt balance during the third quarter increased to $765 million compared with 1.05 billion in the prior year quarter.
On a GAAP basis, our tax rate for the quarter was 3.4%. Our adjusted tax rate for the quarter was a negative 52% the tax rate was primarily affected by the release of tax reserve as well as a true up of prior year taxes. For the third quarter GAAP net income for the quarter was negative $514.6 million resulting in a GAAP EPS of negative $8.94 compared with $0.94 in the prior year quarter. We recorded adjusted net income of 5.4 million down from 7.7 million in the prior year quarter resulting in adjusted earnings per share of $0.09 compared with $0.13 in the prior-year quarter. This is a $0.04 increase from the 5% adjusted EPS that we had in the second quarter.
Year-to-date free cash flow generation was $51 million compared with 208 million in the prior period. As you may recall last year we had a major improvement in free cash flow by significant reduction in our inventory.
Now I’ll turn to the performance of our business segments where we report sales and gross profit turn to the next slides. Third quarter sales in outdoor products were 226 million down 23.2% compared to the prior year quarter. On an organic basis without the effects of eyewear sales, sales were down 9.6% year-over-year. The organic decrease was caused by lower sales across most reporting units due to lower than expected sales in hunt and holiday season.
On a GAAP basis gross profit was $54 million which is a 27% decrease from $74 million in the prior-year quarter. Adjusted gross profit was $56 million a decrease from $74 million in prior quarter down 4.4% on an organic basis. The decline was primarily due to lower volumes, but includes the impact of increased promotional activities across the segment. Additionally, we were able to deliver a sequential improvement in our gross profit rates from 23.6% to 24.9% or 130 basis points.
Turning to the next slide, shooting sports recorded third quarter sales of $241 million down 15.7% from 286 million in the prior-year quarter. Ammunition revenue decreased 17.3% versus prior year as a result of continued softness in both rimfire in 223, 556 markets. Firearms revenue decreased 7.8% due to a softer an anticipated holiday shopping season. Sequentially from the second quarter, both ammunition and firearms reporting units experienced a 12% decrease. Third quarter gross profit and shooting sports was $40 million, down from $52 million in the prior year quarter. The year-over-year decrease was a result of lower sales volumes, increased promotional and rebate activity and unfavorable commodity costs. Sequentially, this is a 17% decrease from the second quarter.
Turning toward guidance on slide seven, we delivered another quarter of solid operating performance reflecting good progress in a number of areas as we execute our strategic transformation plan in a very competitive market environment. Our focus on indirect and direct sourcing initiatives and our productivity improvement plans are well on their way and on track. The investments we made among numerous supply chain and manufacturing efficiency initiatives throughout the fiscal year are expected to drive margin expansion through the remainder of the year and beyond.
In addition, we're beginning to see the positive impact on our profitability as a result of our restructuring activities. We are confident that this trend will continue. Based upon an overall softening of demand in third quarter, we have lowered our full-year fiscal 2019 revenue guidance from $2.1 billion to $2.16 billion to a range of $2.02 billion $2.05 billion.
In addition, we have lowered interest expense guidance from $55 million to $52 million get us the adjusted tax rate from 30% to approximately 20% and our capital expenditures from $60 million to approximately $45 million. Considering all these factors, I would like to summarize our fiscal year '19 guidance as follows. We now expect sales in a range from $2.0 billion to $2.05 billion.
Interest expense at approximately $52 million and adjusted tax rate of approximately 20%. Adjusted earnings per share in a range of $0.20 to $0.35, capital expenditures of approximately $45 million, free cash flow in a range of $70 million to $100 million and R&D generally in line with our prior expectations at approximately $30 million. We expect EBITDA margins of approximately 7% to 7.5%, shooting Sports gross margins of approximately 18% to 20% and gross margins in outdoor products in the low to mid-20s.
So, in summary, with three quarters behind us, we are encouraged about our prospects for the balance of our fiscal year 2019 and beyond. As Chris outlined our priorities are both tangible and clear, the scalability, vision, and relevance of our brands as well as our focus on delivering consistent and disciplined execution are leading us to be a more responsive and effective company than ever before.
Despite top line challenges, our passion for our brands, our businesses and our employees remains unchanged. We are confident that the changes we are making now will translate into increase stability and growth in the future. I'd like to thank all of our employees for their continued hard work, dedication, and efforts during this challenging period. And lastly to our shareholders, thank you for your support during this transformation. We look forward to keeping you updated as we progress into the future.
And now, we'd like to open up all for questions.
Thank you. [Operator Instructions] Our first question comes from Brett Andress of KeyBanc Capital Markets.
Hey, good morning.
Good morning, Brett.
Chris, I know the last time we talked on this call, you had one competitor participating in some pretty irrational pricing practices, selling below cost, I guess where are we at with that situation and how much if any, does that factor into your fourth quarter expectations for shooting sports?
Well, Brett, we feel like that we've anniversary [ph] that, I mean, they put out a particular competitor that I believe that is in question, put out some ridiculously low pricing refill at the end of this past calendar year in kind of that November-December timeframe, and we feel like that's behind us, we feel like we're in a more rational price environment right now. We know that as I've stated previously, we're going to continue as leaders to take a leadership stance on this, and price accordingly in the marketplace to make sure that we're delivering shareholder returns and making sure our customers can continue to make more money. So, we feel like that particular action is largely behind us right now, and I think it's just a combination of everything we mentioned in my scripted remarks that creates a more challenging macro environment that has guided our -- rest of year and full-year guidance.
Understood. And maybe more of a clarification on the Lake City cost increase you mentioned, I know that was dynamically dealt with about a year ago after that contract lapse, but the increase you mentioned in your prepared remarks, is this a new cost increase, if you could just shed a little bit of light on what you mentioned earlier?
Yes, it is, Brett. So obviously, we don't control that facility. We are the majority customer of end supplier to the commercial market for the aftermarket, and they've elected to put a pretty significant price increase in place recently, and unfortunately, that coincided with a softness in the marketplace. So, we found ourselves not only having to absorb a higher price, but frankly having to be promotional on the marketplace with those 556 and 223 rounds. So we just elected to not be as aggressive anymore because of that. So that's a dynamic situation, that could change, and we're hoping that we'll get more rational pricing as we go forward, but our guidance certainly does not reflect that.
Got it. Okay. Then Mick, the last one here, I guess I'm having a hard time conceptually getting to your 18% to 20% segment gross margin guidance in shooting sports for what implies for the fourth quarter, you know, a of very steep ramp and the margin improvement. I mean, I guess, I get that the cost pressure is a beta little bit, but how much of a contributor to the fourth quarter performance is these international shipments that you guys have talked about in the past? I'm trying to square that with the fact that it doesn't really sound like the industry is getting any better at the moment, but also how much you guys, you know, some of the internal things you're doing on the costs front, how much does that help into trying to pull apart some of the moving pieces for what's implied for the fourth quarter there?
Yes. What we see again is an improvement from a couple of segments, one is we continue to have some commodity tailwinds, which will help us in the fourth quarter. We also have this large international shipment we have referred to before, which is significant and does make a difference. And lastly, our continued improvement in productivity due to changes we're doing on the manufacturing floor. So, there will be -- and our expectations and improvement in our gross margins for our shooting sports, and we will maintain our efficiencies in outdoor products.
All right, thank you, guys.
Thank you.
Thanks, Brett.
Our next question comes from Dave King of Roth Capital Partners.
Thanks. Good morning, guys.
Good morning, Dave.
Maybe following up on that last point a bit, real quick, in terms of the continued and improvement in productivity, the free cash guidance, it seems I think a fair amount of improvement in Q4 versus the last couple quarters. Can you talk about what might be driving that? Is that on the inventory side, and then what's that mean in terms of slowing down production, if at all? Thanks.
Yes. So Dave, I'll answer that, and I'll then make an add-on to it. First of all, to continue on Brett's question on the improved margins, I mean, this is the first quarter that we're going to see commodities become a bit of a tailwind, not a lot, but a bit of a tailwind, so that certainly is helping us. Secondly, as we've slowed down -- as market has slowed down and our production is slowed down and our facility as you'd expect, we've taken out a lot of costs, both indirect and direct costs commensurate with the sales drop. So, our ammunition team has done a really, really nice job of right-sizing that facility, including some early retirement programs and some other stuff to make sure that again our costs are in line. They've also taken the opportunity to lean out the facility. So we've had a concerted effort with some outside help to work on relaying out our floors and making sure that our equipment is laid out in the most efficient way possible, so, really just an opportunity to take advantage of a bit of the downtime, if you will.
Now, as it relates to the free cash flow, you see a significant contribution from inventory. So we pre-built a bit of inventories, here inventories up quite a bit here to-date and frankly some of that is just timing. I mean built some products here towards the end of the third quarter to support our sales one without being the international sales that we had talked about before. So some of that is timing and most of the free cash flow change you see in the fourth quarter is us bringing the inventory levels down. Mick, you want add anything there?
Yes, certainly I think that are free cash flow right now stands at a year-to-date $51 million. As you may recall, we had very, very positive first quarter and a positive $70 million. And then second quarter was down about 16 this quarter is basically flat just down about $3 million. So in order for us to make our guidance of $70 million that would entail that we would be in the range of $19 million to $50 million which is certainly something we have done easily in the past. You will notice that we have been very good at collecting RAR but we’ve actually increased our inventory about $30 million quarter-on-quarter from the beginning of year I’ll say significantly more than that. The reason we have done that is we are building ahead to meet Q4. We also have enhanced commitments on time in full delivery for our customers and we also have some e-commerce buildup of inventory. But this inventory will be reduced this quarter and we will continue to -- with our expectations of making our cash flow guidance in the $70 million to $100 million range.
Okay that’s really good color guys thanks for that. Then maybe switches gears on the assets sale side so for the 200 million in net assets call it held for sale. How much EBITDA do you think might go with that I think Mick said they plan to get under five times leverage. So it sounds like that's 35 million to 40 million of EBITDA is that the right way to think about it. And then maybe on the Bell-Giro side what are your updated thoughts there Chris are you still planning to sell it or might you look to maybe turn it around some more first? Thanks.
Yes we have not really given out any numbers for Savage, so I don't think this is the right forum for that. As you know the EBITDA on an adjusted basis will depend and we’re in active negotiations for that obviously that information is being shared with parties involved. Don’t want to make too much speculation on that at this point in time.
And Dave, on the Bell-Giro side, so we've said all along that we are going to sequence our divestitures but with the way we're looking at it now is we’re as we said before we’re optimistic and pretty confident that we're going to announce something here fairly soon in our fourth quarter on Savage. Then we’re going to hit the pause button we feel like we're going to be in a position from a debt standpoint where were in a position that we like for the moment. And we see frankly more upside in the Bell-Giro business given some of the initiatives we’ve got in place with that team, great brands, great team, and we feel like we can drive more value in that business for shareholders by holding onto it versus selling it. So we don't want to do something rash where we would sell a business that's got more upside and more value to us. So we’re going to continue to run that business and we’re excited about it.
Okay, good. Thanks for taking the question.
Yes.
Thank you, Dave.
Our next question comes from Rommel Dionisio of Aegis.
Yes, thanks very much, good morning.
Good morning.
Just question on the ammunition segment -- it gets you guys some statistics Chris on how the sell-through hasn't been has lagged that of firearms. Do you get the sense that participation has actually dropped off or is there inventories coming down at the retail level or at the consumer level. I realize so it will be difficult to measure but I mean the inventories got to be coming down somewhere. Could you maybe give us some color on that?
Yes. So Rom, this is the million dollar question that everybody's been wrestling with over the past two years. And so what we do know with surety is inventory levels have been coming down across the board and that goes from retailer, wholesalers and distributors and retailers and even the consumer. And so we know for certainty that all of that is the case. What we didn't know and what we still don't fully know is how much inventory consumers are sitting on.
Everybody we talked to in all of our surveys whether it be with ranges where you've got a lot of shooting whether it be people that are hunting or what have you or just frankly our own surveys. We talked to thousands of our customers and we don't see any sense that shooting has diminished at all. In fact if anything we think the underlying trends of shooting are very, very healthy. I think what we have discovered in our surveys as people just carry more inventory, and so I think we all underestimated that in the years of the buildup people bought thousands and thousands arounds and when you sit down and you think physically how much room a few thousand rounds takes up and your safe where your closet is. It’s not that much room and so people are just been sitting on a lot of inventory and they are shooting through it. And so we think they've gone from multiple years of inventory to something certainly less than that. So we like the underlying trends and health of the shooting today and we know at some point time here soon people are going back at the registers purchasing to replenish their stock. We just can't say we’re certainty exactly when that's going to happen.
Great, that’s very helpful. Thanks, Chris.
Sure.
[Operator Instructions] Our next question comes from Scott Stember of CL King.
Good morning, guys.
Good morning, Scott.
You guys talked about some, I guess, early successes on the e-commerce front now that you have some new people in place. Maybe just talk about from a broader perspective I know that you’ve talked about being able to drop ship need to be able to I guess standardize some of your shipping practices and things like that. Can you maybe just talk about from a broader perspective where we are with that and maybe just give us an idea on how things are going there? Thanks.
Yes. So, Scott, e-commerce and frankly digital marketing is one of the biggest focuses we have across all of our brands in our business units at Vista. It is no surprise to anybody that e-commerce and sales online have continued to grow and have become in many respects the preferred purchasing route for all sorts of consumers. So, as a result of that, we know that and we've known this for a while that we had to increase our capability to meet this demand.
Secondly, it's unfortunate but we've had a number of customers that have gone out of business or have decided to diminish some of the categories that we participate in. As a result of that, the only way we can increasingly control our own destiny is to make sure that we are promoting our brands larger online. So we are continuing to build out our capability. Now all being said we have some fantastic retail partners who do just a wonderful job and we want to continue to be the best partner we possibly can be. So that would include drop ship where drop ship is a desired.
That would include continuing to drive content, so that they can pull that content and we can use that content to build our brand online, be it social sites, be it through videos, be it through bloggers or what have you. But increasingly what you're going to see from Vista and you have my commitment on this is we’re going to continue to bring in more thought leadership. We’re going to continue to put in what I call the plumbing in each of our brands that is enabling the best systems and architectures to be able to drive the experience that is necessary. And we’re going to make sure we can control our own destiny in this ever changing e-commerce world.
Got it and just last question Mick on the balance sheet where was leverage at the end of the third quarter?
Yes, at the of the third quarter our leverage ratio was about 7.3 and that will improve as you're looking back at last 12 months. We had a Q4 of last year and that was very low. It was about $ 10 million or so, and as we move more towards EBITDA in 30s -- mid 30s that will improve our ratio also.
Got it. That's all I have. Thanks.
Thank you.
Next question comes from Brett Andress of KeyBanc Capital Markets.
Thanks for taking my follow-up, I just had a quick question on the EPS guide. I guess why you are keeping the range so wide with less than 2 months left in the quarter. I guess more specifically, what are the puts and takes you're looking at, that could take you to either the high into the low end of that the PS range?
Yes. Thank you for that, Brett. And look, our expected range for earnings per share is actually tied to some of the revenues and it's a range of $50 million in revenue for the following quarter, and there are many variables that affect this. There're obviously some of these major shipments, the retail environment, pricing and other factors. So the EPS guidance is reflective of the revenue range on anything.
And Brett, I'll just add to that a being frankly at the level of the EPS we're at right now. Yes, you can have small movements in sales, shipments here and shipments there they could have an outsized effect on our earnings per share. And so that's why you see a little bit more of a wider range even with the short period of time we have to go.
Absolutely. Understood. Thank you.
Yes.
At this time, we have no further questions in the queue.
Okay. Thank you for your time today everyone, and appreciate the questions. We look forward to the follow-up calls after this. And we are 14 months into our journey to transform Vista Outdoor, and the progress we have made would clearly not be possible without the talent and commitment of all of our people. I want to all thank all of our employees for what they are doing everyday to make this happen, for their passion in servicing our outdoor enthusiast, our customers and the lifestyle that they like. I also want to thank all of our investors, who have been patience with us through this period of time, and we look forward talking to you in May, when we report our full-year results and discuss the fiscal year 2020 guidance. Thank you very much.
Thank you. Ladies and gentlemen, this concludes today’s teleconference, and you may now disconnect.