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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2020

Commission File No. 001-31552

 

 

 

Smith & Wesson Brands, Inc.

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

87-0543688

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2100 Roosevelt Avenue

Springfield, Massachusetts

 

01104

(Address of principal executive offices)

 

(Zip Code)

(800331-0852

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class

Trading Symbol

Name of exchange on which registered

Common Stock, par value $0.001 per share

SWBI

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐  

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

  

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had 55,903,535 shares of common stock, par value $0.001, outstanding as of September 1, 2020.

 

 


SMITH & WESSON BRANDS, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended July 31, 2020 and 2019

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

4

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

27

 

Item 4. Controls and Procedures

  

27

 

 

 

 

PART II - OTHER INFORMATION

  

29

 

Item 1. Legal Proceedings

  

29

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

Item 6. Exhibits

  

29

Signatures

  

31

EX-31.1

  

 

EX-31.2

  

 

EX-32.1

 

 

EX-32.2

 

 

 

Smith & Wesson®, S&W®, M&P®, M&P Shield®, Performance Center®, Bodyguard®, Governor®, SW22 Victory®, T/C ®, America’s Master Gunmaker ®, Compass®, Contender®, Dimension®, Encore®, Triumph®, Weather Shield®, Caldwell®, Delta Series®, Wheeler®, Tipton®, Frankford Arsenal®, Lockdown®, BOG-POD®, Golden Rod®, Mag Charger®, Hooyman®, Schrade®, Old Timer®, Uncle Henry®, Imperial®, Non-Typical Wildlife Solutions®, Crimson Trace®, Lasergrips®, Laserguard®, Rail Master®, Shockstop®, Laserlyte®, Key Gear®, U-Dig-It®, Bubba®, Bubba Blade®, One Cut and You’re Through®, Gemtech®, G-Core®, Halo®, Integra®, World Class Silencers®, LiNQ®, Stinky Bubba®, and Turkinator™ are some of the registered U.S. trademarks of our company or one of our subsidiaries. American Outdoor Brands CorporationSM, M2.0™, SDVE™, Thompson/Center Arms™, Impact!™, Strike™, Venture™, Defender Series™, Instinctive Activation™, Master Series™, UST™, Blast Jacket™, One™, The Professional’s Choice for Decades™, and World Class Ammunition™ are some of the unregistered trademarks of our company or one of our subsidiaries. This report also may contain trademarks and trade names of other companies.

 

 

 


Statement Regarding Forward-Looking Information

 

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding the impact, if any, of recently issued accounting standards on our consolidated financial statements; assessments that we make about determining segments and reporting units; the features of our outstanding debt; estimated amortization expense of intangible assets for future periods; the outcome of the lawsuits to which we are subject and their effect on us; our belief that the claims asserted in Gemini’s complaint have no merit; our intention to aggressively defend Gemini’s complaint; our intention to vigorously oppose the proceedings related to the complaint filed against us in the Superior Court of the State of California, County of San Diego – Central; our belief that the various allegations described in the Litigation section are unfounded; our belief that we have strong defenses to the actions filed against us by John Pidcock, as trustee of the APSC Creditor Trust; our believe that our accruals for product liability cases and claims are a reasonable quantitative measure of the cost to us of product liability cases and claims; our belief that we have provided adequate accruals for defense costs; the possibility that worsening of conditions or increased fears relating to the pandemic could have a renewed and prolonged effect on manufacturing or employment in China, travel to and from China, or other restrictions on imports – all of which could have a longer-term effect on our sales and profitability in future periods, with regard to concerns surrounding COVID-19, and based on our understanding of the current situation; our expectation on spending for capital expenditures in fiscal 2021; factors affecting our future capital requirements; availability of equity or debt financing on acceptable terms, if at all; our belief that our existing capital resources and credit facilities will be adequate to fund our operations, including our outstanding debt and other commitments, for the next 12 months; our belief that our improved processes and procedures will assist in the remediation of our material weakness, though management is still evaluating the design of these new controls and procedures. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors could cause actual results to differ materially from those indicated by the forward-looking statements. Such factors include, among other, economic, social, political, legislative, and regulatory factors; the potential for increased regulation of firearms and firearm-related products; actions of social activists that could have an adverse effect on our business; the impact of lawsuits; the demand for our products; the state of the U.S. economy in general and the firearm industry in particular; general economic conditions and consumer spending patterns; our competitive environment; the supply, availability, and costs of raw materials and components; speculation surrounding fears of terrorism and crime; our anticipated growth and growth opportunities; our ability to increase demand for our products in various markets, including consumer, law enforcement, and military channels, domestically and internationally; our penetration rates in new and existing markets; our strategies; the operations and performance of the two separate companies after the completed spin-off; our ability to maintain and enhance brand recognition and reputation; risks associated with the establishment of our new 632,000 square foot national logistics facility including the expected benefits; our ability to introduce new products; the success of new products; our ability to expand our markets; our ability to integrate acquired businesses in a successful manner; the potential for cancellation of orders from our backlog; and other factors detailed from time to time in our reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed with the SEC on June 19, 2020.

 

 

 

 


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

As of:

 

 

 

July 31, 2020

 

 

April 30, 2020

 

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

65,271

 

 

$

125,398

 

Accounts receivable, net of allowances for credit losses of $1,411 on

  July 31, 2020 and $1,438 on April 30, 2020

 

 

101,358

 

 

 

93,433

 

Inventories

 

 

149,567

 

 

 

164,191

 

Prepaid expenses and other current assets

 

 

11,015

 

 

 

8,838

 

Income tax receivable

 

 

656

 

 

 

1,595

 

Total current assets

 

 

327,867

 

 

 

393,455

 

Property, plant, and equipment, net

 

 

156,785

 

 

 

157,417

 

Intangibles, net

 

 

69,842

 

 

 

73,754

 

Goodwill

 

 

83,605

 

 

 

83,605

 

Deferred income taxes

 

 

2,396

 

 

 

2,396

 

Other assets

 

 

17,674

 

 

 

18,334

 

 

 

$

658,169

 

 

$

728,961

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

53,829

 

 

$

39,196

 

Accrued expenses and deferred revenue

 

 

49,987

 

 

 

64,602

 

Accrued payroll and incentives

 

 

13,241

 

 

 

14,623

 

Accrued income taxes

 

 

18,905

 

 

 

5,503

 

Accrued profit sharing

 

 

5,877

 

 

 

2,414

 

Accrued warranty

 

 

3,462

 

 

 

3,633

 

Total current liabilities

 

 

145,301

 

 

 

129,971

 

Notes and loans payable, net of current portion

 

 

24,311

 

 

 

159,171

 

Finance lease payable, net of current portion

 

 

39,610

 

 

 

39,873

 

Other non-current liabilities

 

 

11,882

 

 

 

12,828

 

Total liabilities

 

 

221,104

 

 

 

341,843

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $.001 par value, 20,000,000 shares authorized, no shares

   issued or outstanding

 

 

 

 

 

 

Common stock, $.001 par value, 100,000,000 shares authorized, 73,864,745 issued

   and 55,697,883 shares outstanding on July 31, 2020 and 73,526,790 shares

   issued and 55,359,928 shares outstanding on April 30, 2020

 

 

74

 

 

 

74

 

Additional paid-in capital

 

 

269,192

 

 

 

267,630

 

Retained earnings

 

 

390,101

 

 

 

341,716

 

Accumulated other comprehensive income

 

 

73

 

 

 

73

 

Treasury stock, at cost (18,166,862 shares on July 31, 2020 and

   April 30, 2020)

 

 

(222,375

)

 

 

(222,375

)

Total stockholders’ equity

 

 

437,065

 

 

 

387,118

 

 

 

$

658,169

 

 

$

728,961

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME/(LOSS) AND COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

 

 

 

 

For the Three Months Ended July 31,

 

 

 

 

2020

 

 

2019

 

 

 

(In thousands, except per share data)

 

Net sales

 

 

$

277,965

 

 

$

123,665

 

Cost of sales

 

 

 

161,199

 

 

 

75,811

 

Gross profit

 

 

 

116,766

 

 

 

47,854

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

 

 

2,965

 

 

 

3,229

 

Selling, marketing, and distribution

 

 

 

19,269

 

 

 

16,773

 

General and administrative

 

 

 

29,080

 

 

 

26,709

 

Total operating expenses

 

 

 

51,314

 

 

 

46,711

 

Operating income

 

 

 

65,452

 

 

 

1,143

 

Other (expense)/income, net:

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

 

 

151

 

 

 

5

 

Interest expense, net

 

 

 

(1,316

)

 

 

(2,627

)

Total other (expense)/income, net

 

 

 

(1,165

)

 

 

(2,622

)

Income/(loss) from operations before income taxes

 

 

 

64,287

 

 

 

(1,479

)

Income tax expense

 

 

 

15,902

 

 

 

629

 

Net income/(loss)

 

 

 

48,385

 

 

 

(2,108

)

Comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

Change in unrealized loss on interest rate swap

 

 

 

 

 

(420

)

Other comprehensive loss, before income taxes

 

 

 

 

 

(420

)

Income tax benefit on other comprehensive loss

 

 

 

 

 

92

 

Other comprehensive loss, net of tax

 

 

 

 

 

(328

)

Comprehensive income/(loss):

 

 

$

48,385

 

 

$

(2,436

)

Net income/(loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.87

 

 

$

(0.04

)

Diluted

 

 

$

0.86

 

 

$

(0.04

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

55,494

 

 

 

54,783

 

Diluted

 

 

 

56,277

 

 

 

54,783

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Stockholders’

 

(In thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income/(Loss)

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance at April 30, 2019

 

 

72,864

 

 

$

73

 

 

$

263,180

 

 

$

402,946

 

 

$

620

 

 

 

18,167

 

 

$

(222,375

)

 

$

444,444

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,588

 

Change in unrealized loss on interest rate swap,

   net of tax effect

 

 

 

 

 

 

 

 

 

 

 

(328

)

 

 

 

 

 

 

 

 

(328

)

Issuance of common stock under restricted stock

   unit awards, net of shares surrendered

 

 

124

 

 

 

 

 

 

(538

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(538

)

Net loss

 

 

 

 

 

 

 

 

 

 

(2,108

)

 

 

 

 

 

 

 

 

 

 

 

(2,108

)

Balance at July 31, 2019

 

 

72,988

 

 

 

73

 

 

 

264,230

 

 

 

400,838

 

 

 

292

 

 

 

18,167

 

 

 

(222,375

)

 

 

443,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2020

 

 

73,527

 

 

 

74

 

 

 

267,630

 

 

 

341,716

 

 

 

73

 

 

 

18,167

 

 

 

(222,375

)

 

 

387,118

 

Proceeds from exercise of employee stock options

 

 

191

 

 

 

 

 

 

1,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,518

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,041

 

Issuance of common stock under restricted stock

   unit awards, net of shares surrendered

 

 

147

 

 

 

 

 

 

(997

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(997

)

Net income

 

 

 

 

 

 

 

 

 

 

48,385

 

 

 

 

 

 

 

 

 

 

 

 

48,385

 

Balance at July 31, 2020

 

 

73,865

 

 

$

74

 

 

$

269,192

 

 

$

390,101

 

 

$

73

 

 

 

18,167

 

 

$

(222,375

)

 

$

437,065

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months Ended July 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

48,385

 

 

$

(2,108

)

Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

12,888

 

 

 

14,346

 

Loss/(gain) on sale/disposition of assets

 

 

3

 

 

 

 

Provision for losses on notes and accounts receivable

 

 

136

 

 

 

634

 

Stock-based compensation expense

 

 

1,041

 

 

 

1,588

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,811

)

 

 

14,031

 

Inventories

 

 

14,624

 

 

 

(31,678

)

Prepaid expenses and other current assets

 

 

(2,177

)

 

 

(2,822

)

Income taxes

 

 

14,341

 

 

 

397

 

Accounts payable

 

 

14,061

 

 

 

(6,015

)

Accrued payroll and incentives

 

 

(1,382

)

 

 

(10,875

)

Accrued profit sharing

 

 

3,463

 

 

 

686

 

Accrued expenses and deferred revenue

 

 

(14,640

)

 

 

(6,675

)

Accrued warranty

 

 

(171

)

 

 

(612

)

Other assets

 

 

660

 

 

 

428

 

Other non-current liabilities

 

 

(946

)

 

 

(463

)

Net cash provided by/(used in) operating activities

 

 

83,475

 

 

 

(29,138

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Payments to acquire patents and software

 

 

(292

)

 

 

(123

)

Payments to acquire property and equipment

 

 

(7,343

)

 

 

(3,695

)

Net cash used in investing activities

 

 

(7,635

)

 

 

(3,818

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from loans and notes payable

 

 

 

 

 

25,000

 

Payments on finance lease obligation

 

 

(238

)

 

 

(214

)

Payments on notes and loans payable

 

 

(135,000

)

 

 

(1,575

)

Proceeds from exercise of options to acquire common stock

 

 

268

 

 

 

 

Payment of employee withholding tax related to restricted stock units

 

 

(997

)

 

 

(538

)

Net cash (used in)/provided by financing activities

 

 

(135,967

)

 

 

22,673

 

Net decrease in cash and cash equivalents

 

 

(60,127

)

 

 

(10,283

)

Cash and cash equivalents, beginning of period

 

 

125,398

 

 

 

41,015

 

Cash and cash equivalents, end of period

 

$

65,271

 

 

$

30,732

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

1,556

 

 

$

1,690

 

Income taxes

 

$

1,689

 

 

$

235

 

 

7


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(Unaudited)

 

Supplemental Disclosure of Non-cash Investing and Financing Activities:

 

 

 

For the Three Months Ended July 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

 

$

1,051

 

 

$

547

 

Receivable for exercise of options to acquire common stock

 

 

1,250

 

 

 

Adoption of ASU 2016-02:

 

 

 

 

 

 

 

 

Changes in other assets for operating lease obligations

 

 

 

 

10,928

 

Change in property and equipment

 

 

 

 

3,201

 

Changes in finance lease liabilities

 

 

 

 

(4,245

)

Changes in lease liabilities for operating lease obligations

 

 

 

 

11,970

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

8


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

(1) Organization:

We are a leading manufacturer, designer, and provider of consumer products for the shooting, hunting, and rugged outdoor enthusiast. We are one of the largest manufacturers of handguns, modern sporting rifles, and handcuffs in the United States and an active participant in the hunting rifle and suppressor markets. We are also a leading provider of shooting, hunting, and rugged outdoor products and accessories, including knives and cutting tools, sighting lasers, shooting supplies, tree saws, and survival gear. We have two reporting segments: (1) Firearm and (2) Outdoor Products & Accessories.

In our Firearm segment, we manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and muzzleloaders), handcuffs, suppressors, and other firearm-related products for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We sell our firearm products under the Smith & Wesson, M&P, Performance Center, Thompson/Center Arms, and Gemtech brands. We manufacture our firearm products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We also sell our manufacturing services to other businesses to level-load our factories. We sell those services under our Smith & Wesson and Smith & Wesson Precision Components brands.

 

In our Outdoor Products & Accessories segment, we are a leading provider of outdoor products and accessories encompassing hunting, fishing, camping, shooting, and personal security and defense products for rugged outdoor enthusiasts. We conceive, design, produce or source, and sell products and accessories, including shooting supplies, rests, vaults, and other related accessories; premium sportsman knives and tools for fishing and hunting; land management tools for hunting preparedness; harvesting products for post-hunt or post-fishing activities; electro-optical devices, including hunting optics, firearm aiming devices, flashlights, and laser grips; reloading, gunsmithing, and firearm cleaning supplies; and survival, camping, and emergency preparedness products. We develop and market our products at our facility in Columbia, Missouri and contract for the manufacture and assembly of most of our products with third parties located in Asia. We also manufacture some of our electro-optics products at our facility in Wilsonville, Oregon.

 

On November 13, 2019, we announced that we were proceeding with a plan to spin-off our outdoor products and accessories business, or the Separation, and create an independent publicly traded company to conduct that business. On August 24, 2020, we completed the previously announced Separation. See also Note 12 — Subsequent Events, for more information.

(2) Basis of Presentation:

Interim Financial Information – The condensed consolidated balance sheets as of July 31, 2020, the condensed consolidated statements of income/(loss) and comprehensive income/(loss) for the three months ended July 31, 2020 and 2019, the condensed consolidated statements of changes in stockholders’ equity for the three months ended July 31, 2020 and 2019, and the condensed consolidated statements of cash flows for the three months ended July 31, 2020 and 2019 have been prepared by us without audit. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows at July 31, 2020 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2020 has been derived from our audited consolidated financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020. The results of operations for the three months ended July 31, 2020 may not be indicative of the results that may be expected for the year ending April 30, 2021, or any other period.

Reclassification – We have corrected the accompanying consolidated balance sheet as of April 30, 2020 to appropriately present deferred income taxes in the amount of $2.4 million as non-current assets that were previously included in current assets.

9


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

Recently Issued Accounting Standards – In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The requirements of this ASU are effective for financial statements for annual periods beginning after December 15, 2019, and early adoption is permitted. We adopted the new standard on May 1, 2020 and the adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

(3) Leases:

We lease certain of our real estate, machinery, photocopiers, and vehicles under non-cancelable operating lease agreements.

We recognize expenses under our operating lease assets and liabilities at the commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit interest rate. We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our lease agreements do not require material variable lease payments, residual value guarantees, or restrictive covenants. For operating leases, we recognize expense on a straight-line basis over the lease term. Tenant improvement allowances are recorded as an offsetting adjustment included in our calculation of the respective right-of-use asset.

Many of our leases include renewal options that can extend the lease term. The execution of those renewal options is at our sole discretion and are reflected in the lease term when they are reasonably certain to be exercised. The depreciable life of assets and leasehold improvements are limited by the expected lease term.

The amounts of assets and liabilities related to our operating and financing leases as of July 31, 2020 were as follows (in thousands):

 

 

 

Balance Sheet Caption

 

July 31, 2020

 

Operating Leases

 

 

 

 

 

 

Right-of-use assets

 

 

 

$

10,391

 

Accumulated amortization

 

 

 

 

(2,666

)

Right-of-use assets, net

 

Other assets

 

$

7,725

 

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

$

2,566

 

Non-current liabilities

 

Other non-current liabilities

 

 

6,644

 

Total operating lease liabilities

 

 

 

$

9,210

 

Finance Leases

 

 

 

 

 

 

Right-of-use assets

 

 

 

$

40,986

 

Accumulated depreciation

 

 

 

 

(2,622

)

Right-of-use assets, net

 

Property, plant, and equipment, net

 

$

38,364

 

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

 

1,021

 

Non-current liabilities

 

Finance lease payable, net of current portion

 

 

39,610

 

Total finance lease liabilities

 

 

 

$

40,631

 

 

10


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

During the three months ended July 31, 2020, we recorded $809,000 of operating lease costs, of which $215,000 related to short-term leases and not recorded as right-of-use assets. We recorded $510,000 of financing lease amortization and $524,000 of financing lease interest expense during the three months ended July 31, 2020. During the three months ended July 31, 2019, we recorded $1.0 million of operating lease costs, of which $200,000 related to short-term leases, and not recorded as right-of-use assets. We recorded $535,000 of financing lease amortization and $520,000 of financing lease interest expense during the three months ended July 31, 2019. As of July 31, 2020, our weighted average lease term and weighted average discount rate for our operating leases was 4.0 years and 4.6%, respectively. As of July 31, 2020, our weighted average lease term and weighted average discount rate for our financing leases was 18.2 years and 5.0%, respectively, and consisted primarily of our national logistics facility located in Columbia, Missouri. The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight-line basis over the life of the lease.

Future lease payments for all our operating and finance leases for succeeding fiscal years is as follows (in thousands):

 

 

 

Operating

 

 

Financing

 

 

Total

 

2021

 

$

2,290

 

 

$

2,269

 

 

$

4,559

 

2022

 

 

2,855

 

 

 

3,056

 

 

 

5,911

 

2023

 

 

2,665

 

 

 

3,071

 

 

 

5,736

 

2024

 

 

1,622

 

 

 

3,125

 

 

 

4,747

 

2025

 

 

353

 

 

 

3,180

 

 

 

3,533

 

Thereafter

 

 

686

 

 

 

48,783

 

 

 

49,469

 

Total future lease payments

 

 

10,471

 

 

 

63,484

 

 

 

73,955

 

Less amounts representing interest

 

 

(1,261

)

 

 

(22,853

)

 

 

(24,114

)

Present value of lease payments

 

 

9,210

 

 

 

40,631

 

 

 

49,841

 

Less current maturities of lease liabilities

 

 

(2,566

)

 

 

(1,021

)

 

 

(3,587

)

Long-term maturities of lease liabilities

 

$

6,644

 

 

$

39,610

 

 

$

46,254

 

 

During the three months ended July 31, 2020 and 2019, the cash paid for amounts included in the measurement of the liabilities and the operating cash flows was $1.4 million in both periods.

(4) Goodwill and Intangible Assets:

The changes in the carrying amount of goodwill for the three months ended July 31, 2020 by reporting segment were as follows (in thousands):

 

 

 

 

 

 

 

Outdoor

Products &

 

 

 

 

 

 

 

Firearm

Segment

 

 

Accessories

Segment

 

 

Total

Goodwill

 

Balance as of April 30, 2020

 

$

19,024

 

 

$

64,581

 

 

$

83,605

 

Adjustments

 

 

 

 

 

 

 

 

 

Balance as of July 31, 2020

 

$

19,024

 

 

$

64,581

 

 

$

83,605

 

 

See Note 11 — Segment Reporting for more detail on segment financial information.  

11


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

The following table presents a summary of intangible assets as of July 31, 2020 and April 30, 2020 (in thousands):

 

 

 

July 31, 2020

 

 

April 30, 2020

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer relationships

 

$

92,560

 

 

$

(55,341

)

 

$

37,219

 

 

$

92,560

 

 

$

(52,981

)