10-Q
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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, 2021

Commission File No. 001-31552

 

 

https://cdn.kscope.io/aa9fca29cae54381e9ea85edc6c107ec-img124024580_0.jpg 

 

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)

(800) 331-0852

(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 48,053,927 shares of common stock, par value $0.001, outstanding as of August 30, 2021.

 


 

SMITH & WESSON BRANDS, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended July 31, 2021 and 2020

 

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

 

19

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

23

 

Item 4. Controls and Procedures

 

24

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

25

 

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

 

25

 

Item 6. Exhibits

 

25

Signatures

 

27

EX-31.1

 

 

EX-31.2

 

 

EX-32.1

 

 

EX-32.2

 

 

 

Smith & Wesson®, S&W®, M&P®, M&P Shield®, Performance Center®, Airlite®, Airweight®, Armornite®, Bodyguard®, Carry Comp®, Chiefs Special®, EZ®, Governor®, Lever Lock®, Magnum®, SW22 Victory®, T/C ®, America’s Master Gunmaker ®, Compass®, Contender®, Dimension®, Encore®, Flextech®, Mag Express®, Maxi-Hunter®, Maxima®, Number 13®, Power Rod®, QLA®, Quick Load Accurizer®, Speed Breech®, Speed Breach XT®, Swing Hammer®, T17®, T/CR22®, Triumph®, U-View®, Weather Shield®, Gemtech®, Arrow®, Aurora®, Aurora-II®, Blast Jacket®, Dagger®, G-Core®, GM®, Halo®, Integra®, Lunar®, Mist-22®, Quickmount®, Shield®, Silencer Subsonic®, The Professional’s Choice for Decades®, Trek®, Viper®, World Class Silencers®, Smith & Wesson Precision Components®, and Put A Legend On Your Line®, are some of the registered U.S. trademarks of our company or one of our subsidiaries. 460XVR™, C.O.R.E.™, E-Series™, M2.0™, S&W500™, SD™, SDVE™, Sport™, SW1911™, Thompson/Center Arms™, Cheap Shot™, Impact!™, Impact!SB™, Katahdin™, Maxi-Ball™, Natural Lube 1000 Plus™, Pro Hunter™, Pro Hunter FX™, Pro Hunter XT™, Quickshot™, Speed Shot™, Strike™, Super Glide™, Venture™, Alpine™, GMT-Halo™, One™, Patrolman™, and Tracker™, 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; the features of our outstanding debt; lease payments for future periods; 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 with respect to the various matters described in the Litigation section, that the allegations are unfounded and the claims asserted against us have no merit; our intention to aggressively defend these actions; our belief that any incident and any injuries were due to negligence or misuse of the firearm by the claimant or a third party; our belief that we have strong defenses; our belief 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; our expectation on spending for capital expenditures in fiscal 2022; factors affecting our future capital requirements; availability of equity or debt financing on acceptable terms, if at all; our expectation that finished goods inventory will continue to increase in the next quarter as we restock in anticipation of providing our customers with a more robust selection of inventory and prepare for the next increase in consumer demand; and our belief that our existing capital resources and credit facilities will be adequate to fund our operations, including our finance leases and other commitments, for the next 12 months. 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; our ability to maintain and enhance brand recognition and reputation; 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, 2021, filed with the SEC on June 17, 2021.

 

 


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

As of:

 

 

 

July 31, 2021

 

 

April 30, 2021

 

 

 

(In thousands, except par value and share data)

 

 ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

171,413

 

 

$

113,017

 

Accounts receivable, net of allowances for credit losses of $52 on
   July 31, 2021 and $
107 on April 30, 2021

 

 

41,198

 

 

 

67,442

 

Inventories

 

 

97,140

 

 

 

78,477

 

Prepaid expenses and other current assets

 

 

8,504

 

 

 

8,408

 

Income tax receivable

 

 

 

 

 

909

 

Total current assets

 

 

318,255

 

 

 

268,253

 

Property, plant, and equipment, net

 

 

139,626

 

 

 

141,612

 

Intangibles, net

 

 

4,360

 

 

 

4,417

 

Goodwill

 

 

19,024

 

 

 

19,024

 

Other assets

 

 

11,405

 

 

 

13,082

 

 

 

$

492,670

 

 

$

446,388

 

 LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

54,583

 

 

$

57,337

 

Accrued expenses and deferred revenue

 

 

33,554

 

 

 

33,136

 

Accrued payroll and incentives

 

 

8,267

 

 

 

17,381

 

Accrued income taxes

 

 

22,236

 

 

 

1,157

 

Accrued profit sharing

 

 

18,279

 

 

 

14,445

 

Accrued warranty

 

 

1,902

 

 

 

2,199

 

Total current liabilities

 

 

138,821

 

 

 

125,655

 

Deferred income taxes

 

 

904

 

 

 

904

 

Finance lease payable, net of current portion

 

 

38,509

 

 

 

38,786

 

Other non-current liabilities

 

 

14,377

 

 

 

14,659

 

Total liabilities

 

 

192,611

 

 

 

180,004

 

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, 74,298,308 issued
   and
48,046,090 shares outstanding on July 31, 2021 and 74,222,127 shares
   issued and
49,937,329 shares outstanding on April 30, 2021

 

 

74

 

 

 

74

 

Additional paid-in capital

 

 

274,068

 

 

 

273,431

 

Retained earnings

 

 

398,219

 

 

 

325,181

 

Accumulated other comprehensive income

 

 

73

 

 

 

73

 

Treasury stock, at cost (26,252,218 shares on July 31, 2021 and 24,284,798 on
   April 30, 2021)

 

 

(372,375

)

 

 

(332,375

)

Total stockholders’ equity

 

 

300,059

 

 

 

266,384

 

 

 

$

492,670

 

 

$

446,388

 

 

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

(Unaudited)

 

 

For the Three Months Ended July 31,

 

 

2021

 

 

2020

 

 

(In thousands, except per share data)

 

Net sales

$

274,609

 

 

$

229,885

 

Cost of sales

 

144,667

 

 

 

137,461

 

Gross profit

 

129,942

 

 

 

92,424

 

Operating expenses:

 

 

 

 

 

Research and development

 

1,808

 

 

 

1,906

 

Selling, marketing, and distribution

 

10,634

 

 

 

9,995

 

General and administrative

 

17,614

 

 

 

21,780

 

Total operating expenses

 

30,056

 

 

 

33,681

 

Operating income from continuing operations

 

99,886

 

 

 

58,743

 

Other income/(expense), net:

 

 

 

 

 

Other income/(expense), net

 

660

 

 

 

67

 

Interest expense, net

 

(544

)

 

 

(1,316

)

Total other income/(expense), net

 

116

 

 

 

(1,249

)

Income from continuing operations before income taxes

 

100,002

 

 

 

57,494

 

Income tax expense

 

23,120

 

 

 

14,193

 

Income from continuing operations

 

76,882

 

 

 

43,301

 

Discontinued operations:

 

 

 

 

 

Income from discontinued operations, net of tax

 

 

 

 

5,084

 

Net income

 

76,882

 

 

 

48,385

 

Net income per share:

 

 

 

 

 

Basic - continuing operations

$

1.59

 

 

$

0.78

 

Basic - net income

$

1.59

 

 

$

0.87

 

Diluted - continuing operations

$

1.57

 

 

$

0.77

 

Diluted - net income

$

1.57

 

 

$

0.86

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

48,394

 

 

 

55,494

 

Diluted

 

49,050

 

 

 

56,277

 

 

 

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

 

 

 Shares

 

 

Amount

 

 

Equity

 

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 - continuing
  operations

 

 

 

 

 

 

 

 

884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

884

 

Stock-based compensation - discontinued
  operations

 

 —

 

 

 —

 

 

 

157

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

157

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2021

 

 

74,222

 

 

 

74

 

 

 

273,431

 

 

 

325,181

 

 

 

73

 

 

 

24,285

 

 

 

(332,375

)

 

 

266,384

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,452

 

Issuance of common stock under restricted
  stock unit awards, net of shares
  surrendered

 

 

76

 

 

 

 

 

 

(815

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(815

)

Repurchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

1,967

 

 

 

(40,000

)

 

 

(40,000

)

Dividends issued

 

 —

 

 

 —

 

 

 —

 

 

 

(3,844

)

 

 —

 

 

 —

 

 

 —

 

 

 

(3,844

)

Net income

 

 

 

 

 

 

 

 —

 

 

 

76,882

 

 

 

 

 

 

 

 

 

 

 

 

76,882

 

Balance at July 31, 2021

 

 

74,298

 

 

$

74

 

 

$

274,068

 

 

$

398,219

 

 

$

73

 

 

 

26,252

 

 

$

(372,375

)

 

$

300,059

 

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 Three Months Ended July 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

Income from continuing operations

 

$

76,882

 

 

$

43,301

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

7,466

 

 

 

8,244

 

Loss on sale/disposition of assets

 

 

57

 

 

 

3

 

Provision for losses on notes and accounts receivable

 

 

(56

)

 

 

38

 

Stock-based compensation expense

 

 

1,452

 

 

 

884

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

26,300

 

 

 

1,851

 

Inventories

 

 

(18,663

)

 

 

23,767

 

Prepaid expenses and other current assets

 

 

(96

)

 

 

(973

)

Income taxes

 

 

21,988

 

 

 

14,340

 

Accounts payable

 

 

(2,443

)

 

 

7,769

 

Accrued payroll and incentives

 

 

(9,114

)

 

 

(1,664

)

Accrued profit sharing

 

 

3,834

 

 

 

3,405

 

Accrued expenses and deferred revenue

 

 

405

 

 

 

(18,638

)

Accrued warranty

 

 

(297

)

 

 

(175

)

Other assets

 

 

1,677

 

 

 

796

 

Other non-current liabilities

 

 

(305

)

 

 

(1,225

)

Cash provided by operating activities - continuing operations

 

 

109,087

 

 

 

81,723

 

Cash provided by operating activities - discontinued operations

 

 

 

 

 

2,507

 

Net cash provided by operating activities

 

 

109,087

 

 

 

84,230

 

Cash flows from investing activities:

 

 

 

 

 

 

Payments to acquire patents and software

 

 

(69

)

 

 

(187

)

Proceeds from sale of property and equipment

 

 

70

 

 

 

 

Payments to acquire property and equipment

 

 

(5,769

)

 

 

(6,465

)

Cash used by investing activities - continuing operations

 

 

(5,768

)

 

 

(6,652

)

Cash used by investing activities - discontinued operations

 

 

 

 

 

(995

)

Net cash used in investing activities

 

 

(5,768

)

 

 

(7,647

)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on finance lease obligation

 

 

(264

)

 

 

(238

)

Payments on notes and loans payable

 

 

 

 

 

(135,000

)

Payments to acquire treasury stock

 

 

(40,000

)

 

 

 

Dividend distribution

 

 

(3,844

)

 

 

 

Proceeds from exercise of options to acquire common stock

 

 

 

 

 

268

 

Payment of employee withholding tax related to restricted stock units

 

 

(815

)

 

 

(997

)

Cash used in by financing activities - continuing operations

 

 

(44,923

)

 

 

(135,967

)

Net cash used in by financing activities

 

 

(44,923

)

 

 

(135,967

)

Net increase/(decrease) in cash and cash equivalents

 

 

58,396

 

 

 

(59,384

)

Cash and cash equivalents, beginning of period

 

 

113,017

 

 

 

125,011

 

Cash and cash equivalents, end of period

 

$

171,413

 

 

$

65,627

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

538

 

 

$

1,556

 

Income taxes

 

$

1,131

 

 

$

1,689

 

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

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,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

 

$

435

 

 

$

986

 

Receivable for exercise of options to acquire common stock

 

 

 

 

1,250

 

 

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, 2021 and 2020

 

(1) Organization:

We are one of the world’s leading manufacturers and designers of firearms. 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 firearm 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 products under the Smith & Wesson, M&P, Thompson/Center Arms, and Gemtech brands. We manufacture our 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.

 

On November 13, 2019, we announced that we were proceeding with a plan to spin-off our outdoor products and accessories business and create an independent publicly traded company to conduct that business, or the Separation. On August 24, 2020, or the Distribution Date, we completed the Separation. See also Note 3 — Discontinued Operations, for more information.

(2) Basis of Presentation:

Interim Financial Information – The condensed consolidated balance sheet as of July 31, 2021, the condensed consolidated statements of income for the three months ended July 31, 2021 and 2020, the condensed consolidated statements of changes in stockholders’ equity for the three months ended July 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the three months ended July 31, 2021 and 2020 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 for the three months ended July 31, 2021 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2021 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, 2021. The results of operations for the three months ended July 31, 2021 may not be indicative of the results that may be expected for the fiscal year ending April 30, 2022, or any other period.

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," an update that amends and simplifies the accounting for income taxes by removing certain exceptions in the existing guidance and providing new guidance to reduce complexity in certain areas. The guidance went into effect at the start of this fiscal year ending April 30, 2022 with early adoption permitted. We have reviewed the amendments in this update and determined that there were no material changes or impacts on our condensed consolidated financial statements.

 

(3) Discontinued Operations:

 

On November 13, 2019, we announced the Separation. On the Distribution Date, at 12:01 a.m. Eastern Time, the Separation of our wholly owned subsidiary, American Outdoor Brands, Inc., a Delaware corporation, or AOUT, from our company was completed. The Separation was treated as tax free for U.S federal income tax purposes and was achieved through the transfer of all the assets and legal entities, subject to any related liabilities, associated with our outdoor products and accessories business to AOUT, or the Transfer, and the distribution of 100% of the AOUT outstanding capital stock to holders of our common stock, or the Distribution, as of the close of business on August 10, 2020, or the Record Date. In connection with the Distribution, our stockholders received one share of AOUT common stock for every four shares of our common stock held as of the close of business on the Record Date. Following the Distribution, AOUT became an independent, publicly traded company, and we retain no ownership interest in AOUT. For the three months ended July 31, 2020, we recorded $3.6 million in general and administrative expenses related to the Separation and there was no gain/(loss) recognized for the Separation. In connection with the Separation, we distributed $25.0 million in cash to AOUT.

 

Our common stock continues to trade on the Nasdaq Global Select Market under the ticker symbol “SWBI,” and AOUT is now trading shares of common stock listed on the Nasdaq Global Select Market under the ticker symbol “AOUT.” The outdoor products and accessories business historical financial data is recorded as discontinued operations. Please refer to our Current Report on Form 8-K filed on August 26, 2020 for more information regarding the Separation. As a result of the Separation, we divested net assets of $260.4 million, which includes the $25.0 million cash distribution to AOUT, in the prior fiscal year.

9


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2021 and 2020

 

 

The results of AOUT were previously reported in our Outdoor Products & Accessories segment. The historical financial data of the outdoor products and accessories business through August 23, 2020 is recorded as discontinued operations in income from discontinued operations in the condensed consolidated financial statements. For the three months ended July 31, 2020, income from discontinued operations, net of tax was $5.1 million.

 

In connection with the Separation, we entered into several agreements with AOUT that govern the relationship of the parties following the Separation, including a Separation and Distribution Agreement, a Tax Matters Agreement, a Transition Services Agreement, and an Employee Matters Agreement. Under the terms of the Transition Services Agreement, both companies agreed to provide each other certain transitional services, including information technology, information management, human resources, employee benefits administration, facilities, and other limited finance and accounting related services, for periods up to 24 months. Payments and operating expense reimbursements for transition services are recorded accordingly in our condensed consolidated financial statements based on the service provided.

 

The following table summarizes the major line items for the outdoor products and accessories business that are included in income from discontinued operations, net of tax, in the condensed consolidated statements of income:

 

 

 

For the Three Months Ended July 31,

 

 

 

2021

 

 

2020

 

 

 

 (In thousands)

 

Net revenues

 

$

 

 

$

48,080

 

Cost of sales

 

 

 

 

 

23,738

 

Operating expenses

 

 

 

 

 

17,633

 

Other income, net

 

 

 

 

 

84

 

Income from discontinued operations before
   income taxes

 

 

 

 

 

6,793

 

Income tax expense

 

 

 

 

 

1,709

 

Income from discontinued operations, net of tax

 

$

 

 

$

5,084

 

 

(4) Leases:

We lease certain of our real estate, machinery, equipment, 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. We record tenant improvement allowances as an offsetting adjustment included in our calculation of the respective right-of-use asset.

Many of our leases include renewal options that enable us to 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.

10


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2021 and 2020

 

The amounts of assets and liabilities related to our operating and financing leases as of July 31, 2021 were as follows (in thousands):

 

 

 

Balance Sheet Caption

 

July 31, 2021

 

Operating Leases

 

 

 

 

 

Right-of-use assets

 

 

 

$

7,154

 

Accumulated amortization

 

 

 

 

(2,631

)

Right-of-use assets, net

 

Other assets

 

$

4,523

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

$

1,349

 

Non-current liabilities

 

Other non-current liabilities

 

 

3,344

 

Total operating lease liabilities

 

 

 

$

4,693

 

Finance Leases

 

 

 

 

 

Right-of-use assets

 

 

 

$

40,986

 

Accumulated depreciation

 

 

 

 

(4,757

)

Right-of-use assets, net

 

Property, plant, and equipment, net

 

$

36,229

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

$

1,101

 

Non-current liabilities

 

Finance lease payable, net of current portion

 

 

38,509

 

Total finance lease liabilities

 

 

 

$

39,610

 

 

For the three months ended July 31, 2021, we recorded $371,000 of operating lease costs, of which $33,000 related to short-term leases that were not recorded as right-of-use assets. We recorded $525,000 of financing lease amortization and $497,000 of financing lease interest expense for the three months ended July 31, 2021. As of July 31, 2021, our weighted average lease term and weighted average discount rate for our operating leases was 3.9 years and 4.5%, respectively. As of July 31, 2021, our weighted average lease term and weighted average discount rate for our financing leases were 17.2 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.

 

With the completion of the Separation, we entered into a sublease whereby AOUT subleases from us 59.0% of our national logistics facility under the same terms as the master lease. For the three months ended July 31, 2021, we recorded $501,000 of income related to this sublease agreement, which is recorded in other income in our condensed consolidated statements of income.

 

The following table represents future expected undiscounted cashflows, based on the sublease agreement to AOUT, to be received on an annual basis for the next five years and thereafter, as of July 31, 2021 (in thousands):

 

Fiscal

 

 Amount

 

2022

 

$

1,401

 

2023

 

 

1,897

 

2024

 

 

1,930

 

2025

 

 

1,964

 

2026

 

 

1,998

 

Thereafter

 

 

26,514

 

Total future sublease receipts

 

 

35,704

 

Less amounts representing interest

 

 

(13,024

)

Present value of sublease receipts

 

$

22,680

 

 

11


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2021 and 2020

 

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

 

 

 

 

 

Operating

 

 

Financing

 

 

Total

 

2022

 

 

 

$

1,179

 

 

$

2,295

 

 

$

3,474

 

2023

 

 

 

 

1,584

 

 

 

3,071

 

 

 

4,655

 

2024

 

 

 

 

1,576

 

 

 

3,125