UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.     )

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Filed by a Party other than the Registrant  ☐

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MEETING AND PROXY STATEMENT 2022 NOTICE OF ANNUAL STOCKHOLDER MEETING AND PROXY STATEMENT

 

 

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

The Annual Meeting of Stockholders of Smith & Wesson Brands, Inc., a Nevada corporation, will be held at 10:00 a.m., Eastern Time, on Monday, September 12, 2022 (the “2022 Annual Meeting”). The 2022 Annual Meeting will be a virtual meeting of stockholders. You will be able to attend the 2022 Annual Meeting, vote, and submit your questions during the live webcast of the meeting by visiting www.virtualshareholdermeeting.com/SWBI2022 and entering the 16-digit control number included on your proxy card or in the instructions that accompanied your proxy materials.

 

The 2022 Annual Meeting will be held for the following purposes:

 

 

Stockholders of record at the close of business on July 18, 2022 may vote at the 2022 Annual Meeting.

 

These proxy materials were first made available to our stockholders on the internet on August 3, 2022.

 

Sincerely,

 

 

Kevin A. Maxwell

Senior Vice President,

General Counsel, Chief Compliance Officer, and Secretary

August 3, 2022

 

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Table of Contents

 

 

 

 

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PROXY STATEMENT SUMMARY

This summary highlights information contained elsewhere in this Proxy Statement. You should read this entire Proxy Statement carefully before voting.

 

 

 

* = Independent Nominee; ** = Committee Chair; § = Chairman; §§ = Vice Chairman

AC = Audit Committee; CC = Compensation Committee; ESG = Environmental, Social, and Governance Committee; NCG = Nominations and Corporate Governance Committee

 

 

 

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PERFORMANCE HIGHLIGHTS AND KEY ACCOMPLISHMENTS

Our performance highlights for the fiscal year ended April 30, 2022 (“fiscal 2022”) include:

Our fiscal 2022 key accomplishments include:

GOVERNANCE HIGHLIGHTS

Board Refreshment

We recognize the importance of board refreshment. Among our eight director nominees, four have joined the Board since 2018 and two joined last year. These changes demonstrate the Board’s commitment to refreshment, including with independent nominees who provide perspectives and experience to advance our business. Our director nominees include one woman, one racial minority, and one ethnic minority.

Enhanced Disclosure

In response to feedback that we received from our investors, we have expanded our public disclosures both in documents filed with the Securities and Exchange Commission (“SEC”) and through the publication of other relevant material. In November 2021, we published our first Environmental Factsheet, which, among other things, highlighted our commitment to responsible environmental practices and described our approach to environmental management. In June 2022, we published our first Firearm Market Factsheet, which was intended to increase transparency around our business practices by, among other things, describing our go-to-market sales approach and highlighting our commitment to promoting responsible firearm ownership.

ESG Oversight

We recognize that progress on environmental, social, and governance (“ESG”) matters is an ongoing journey of continuous improvement. We are continuously improving our ESG strategy. In 2021, the Board formed the Environmental, Social, and Governance Committee (the “ESG Committee”) to assist the Board and its committees in fulfilling the Board’s oversight responsibilities with various environmental, social, health, safety, and governance policies and operational control matters relevant to us.

Stockholder Engagement

We recognize the importance of stockholder engagement. We engage year-round with our stockholders to ensure that we understand and consider the issues that matter most to them. For example, prior to our annual meeting of stockholders held on September 27, 2021 (the “2021 Annual Meeting”), we met with our largest investors to discuss the stockholder proposal that was included in our proxy materials. In March and July 2022, we met again with some of those investors to discuss the progress we have made on our ESG journey.  In addition to engaging with our largest investors, we have devoted significant resources engaging with the stockholder proponent for Proposal #5 – we spoke directly with the proponent on four occasions since the 2021 Annual Meeting.

 

 

 

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PROPOSAL ONE – ELECTION OF DIRECTORS

 

Director Nominees

The Board has eight members. Pursuant to the recommendation of the NCG Committee, the Board has nominated each current director for election at the 2022 Annual Meeting. If elected, each director nominee will hold office until the 2023 Annual Meeting and until his or her successor is elected and qualified. If any director nominee is unable or declines to serve as a director at the time of the 2022 Annual Meeting, the proxies will be voted for any nominee designated by our current Board to fill the vacancy. We do not expect that any director nominee will be unable or will decline to serve as a director.

 

All director nominees have held senior-level positions in business or professional service firms and have experience in dealing with complex issues. We believe that all director nominees are individuals of high character and integrity, are able to work well with others, and have committed to devote sufficient time to our business and affairs. Information about the director nominees, including about their qualifications and skills to serve on the Board, is set forth below.

 

 

 

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board and governance matters

GOVERNANCE FRAMEWORK

Our business and affairs are managed under the direction of our board of directors (the “Board”), subject to limitations and other requirements in our charter documents or in applicable statutes, rules, and regulations, including those of the SEC and the Nasdaq Stock Market (“Nasdaq”).

 

Our governance framework supports independent oversight and accountability.

 

Our governance framework is based on our Amended and Restated Bylaws (our “Bylaws”), as well as the key governance documents listed below:

 

Copies of these documents are available on our website, www.smith-wesson.com, or upon written request sent to our Corporate Secretary at our principal executive offices located at 2100 Roosevelt Avenue, Springfield, Massachusetts 01104. The information on our website is not part of this Proxy Statement.

 

BOARD COMPOSITION

Director Nomination Process

The NCG Committee is responsible for identifying and evaluating Board nominees.  In identifying candidates, the NCG Committee may take into account all factors it considers appropriate, which may include strength of character, mature judgment, career specialization, relevant technical skills, diversity, and the extent to which the candidate would fill a present need on the Board.

 

Stockholder-Recommended Candidates. The NCG Committee will consider persons recommended by our stockholders for inclusion as Board nominees if the information required by our Bylaws is submitted in writing in a timely manner addressed and delivered to our Secretary.

 

Stockholder-Nominated Candidates. We have a “Proxy Access for Director Nominations” bylaw that permits a stockholder, or a group of up to 20 stockholders, owning 3% or more of our outstanding common stock continuously for at least three years to nominate and include in our proxy materials Board nominees constituting up to two individuals or 20% of the Board (whichever is greater); provided that the stockholder(s) and the nominee(s) satisfy the requirements specified in our Bylaws.

 

 

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Director Independence and Other Qualifications

Under the Guidelines and the Nasdaq listing standards, the Board must consist of a majority of independent directors. The Board annually reviews director independence and has determined that all director nominees, except for Mr. Smith (who is our President and CEO), are independent, as “independence” is defined by the SEC and the Nasdaq listing standards.

 

The NCG Committee is responsible for reviewing with the Board annually the requisite skills and characteristics required for new Board members, as well as Board composition. The assessment, which is made based on the perceived needs of the Board from time to time, may include, among others, consideration of the following:

 

 

 

 

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Majority Voting Standard

Our directors are elected by a majority of the votes cast for them in uncontested elections. If an incumbent director does not receive the requisite majority of votes cast, then the director is expected to submit his or her resignation to the Board.  Based on the recommendation of the NCG Committee, the Board would determine whether to accept the resignation and would publicly disclose its decision and its rationale. A director who tenders his or her offer of resignation would abstain from any decision or recommendation regarding the offered resignation.

Board Refreshment

 

Ms. Britt and Mr. Smith joined the Board in 2018 and 2020, respectively, and Messrs. Diaz and Suggs joined the Board in 2021.

 

The Board has not established a mandatory retirement age.  Pursuant to the Guidelines, the Board and the NCG Committee will review, in connection with the process of selecting nominees for election at annual stockholder meetings, each director’s continuation on the Board.

 

The Board has not established term limits because it believes that term limits involve the disadvantage of losing the contribution of directors who have been able to develop, over a period of time, increasing insight into us and our operations and, therefore, provide an increasing contribution to the Board as a whole. However, the NCG Committee reviews each director’s continuation on the Board at least every three years, which, among other things, allows the Board, through the NCG Committee, to consider the appropriateness of the director’s continued service.  

Over-Boarding Policy

Our directors may not serve on more than three other public company boards, unless it is determined, based on the individual facts, that such service will not interfere with service on the Board. None of our director nominees serves on more than three other public company boards and our CEO does not serve on any other public company board.

 

BOARD AND COMMITTEE GOVERNANCE

Risk Oversight

The Board recognizes that risk is inherent in every business. As is the case in virtually all businesses, the Board recognizes that we face a number of risks, including operational, economic, financial, legal, regulatory, and competitive risks. While our management is responsible for the day-to-day management of the risks we face, the Board, as a whole and through its committees, is responsible for the oversight of risk management.

 

The Board’s involvement in our business strategy and strategic plans plays a key role in its oversight of risk management, its assessment of management’s risk appetite, and its determination of the appropriate level of enterprise risk. The Board receives updates at least quarterly from senior management and periodically from outside advisors regarding the various risks we face, including operational, economic, financial, cybersecurity, legal, regulatory, and competitive risks. The Board also reviews the various risks we identify in our SEC filings, as well as risks relating to various specific developments, such as acquisitions, securities repurchases, and new product introductions. In addition, the Board regularly receives reports from senior members of our Internal Audit function and our General Counsel and Chief Compliance Officer.

 

 

 

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See Part I, “Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended April 30, 2022 (the “Form 10-K”) to learn more about the risks we face. The risks described in the Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known or that may currently be deemed to be immaterial based on the information known to us also may materially and adversely affect our business, operating results, and financial condition.

 

 

Cybersecurity Risk Oversight. We recognize the importance of cybersecurity risk governance.  The Audit Committee receives regular reports from management on, among other things, the emerging threat landscape and our cybersecurity risks and threats.  The Audit Committee regularly briefs the full Board on these matters.  We have adopted a Cyber Incident Response Plan.

 

ESG Risk Oversight.  We recognize the importance to our stakeholders of ESG matters. In 2021, the Board formed the ESG Committee to assist the Board and its committees in fulfilling the Board’s oversight responsibilities with various environmental, social, health, safety, and governance policies and operational control matters relevant to us. In part, the ESG Committee reviews emerging risks and opportunities associated with ESG matters.

 

Board Leadership Structure

Our Corporate Governance Guidelines support flexibility in the structure of the Board by not requiring the separation of the roles of CEO and Chairman. We maintain separate roles between our CEO and Chairman in recognition of the differences between the responsibilities of these roles. The Board believes this leadership structure is the most effective for us at this time because it allows our CEO to focus on running our business and our Chairman to focus on pursuing sound governance practices that benefit the long-term interests of our stockholders.

 

 

 

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Board Committees

The Board has four standing committees, each of which is comprised of independent directors: the Audit Committee, the Compensation Committee, the NCG Committee, and the ESG Committee.

 

 

 

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Meeting Attendance in Fiscal 2022

In fiscal 2022, the Board held six meetings and its committees held a total of 22 meetings. Each director attended 75% or more of the aggregate of all meetings of the Board and the committees on which he or she served. We encourage our directors to attend our annual meetings of stockholders. All directors attended the 2021 Annual Meeting.

Executive Sessions

We regularly schedule executive sessions in which independent directors meet without the presence or participation of management. Our Chairman serves as the presiding director of these executive sessions during Board meetings, and our committee chairs preside at the sessions held during committee meetings.

Stockholder Engagement

We meet with investors throughout the year and consider investor feedback on emerging issues, which allows us to better understand their priorities and perspectives. This year-round engagement provides us with useful input and enables us to consider developments proactively.  In addition, from time to time, we conduct stockholder outreach programs. Prior to the 2021 Annual Meeting, we requested meetings with the corporate governance teams at stockholders representing 32% of our outstanding shares, as a result of which we engaged with teams at stockholders representing 25% of our outstanding shares. We primarily discussed the stockholder proposal that was included in our proxy materials for the 2021 Annual Meeting. In March 2022 and July 2022, we requested meetings with the corporate governance teams at stockholders representing 29% and 27%, respectively, of our outstanding shares, as a result of which we engaged with teams at stockholders representing 14% and 10%, respectively, of our outstanding shares. These discussions included our CEO, CFO, and General Counsel, as well as the Chair of the ESG Committee and, on one occasion, our Chairman. Among the topics discussed were opportunities to improve our public disclosures related to topics of importance to our stakeholders, workforce diversity, and risk oversight.

 

 

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In response to direct feedback we received from many of our largest investors, we have expanded our public disclosures both in SEC-filed documents and through the publication of other relevant documents.

Environmental Factsheet. In November 2021, we published our first Environmental Factsheet, which, among other things, highlighted our commitment to responsible environmental practices, described our approach to environmental management, and listed a number of environmental impact highlights.

Firearm Market Factsheet.  In June 2022, we published our first Firearm Market Factsheet, which was intended to increase transparency around our business practices by, among other things, describing our go-to-market approach to both domestic and international sales and highlighting our commitment to promoting responsible firearm ownership.

Copies of the Environmental Factsheet and the Firearm Market Factsheet are available on our website, www.smith-wesson.com. The information on our website is not part of this Proxy Statement.

 

ADDITIONAL GOVERNANCE MATTERS

Corporate Political Contributions and Expenditures

We have a policy to post on our website each fiscal year an annual report disclosing all political contributions or expenditures in the United States that are not deductible as “ordinary and necessary” business expenses under Section 162(e) of the Internal Revenue Code in excess of $50,000. Non-deductible amounts generally include contributions to or expenditures in support of or opposition to political candidates, political parties, or political committees.

Director and Officer Derivative Trading and Hedging

We have a policy prohibiting our directors and officers, including our executive officers, and any family member residing in the same household, from engaging in derivatives trading and hedging involving our securities or pledging or margining our common stock.

Whistleblower Policy

We have a policy covering the policies and procedures for (i) the receipt, retention, and treatment of complaints that we receive regarding accounting, internal controls, or auditing matters; and (ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters.

Corporate Stewardship Policy

We have a policy, pursuant to which, in order to meet our objective of being a good corporate steward, we will consider, among other things, our responsibilities with respect to employee, safety, and governance risks, including the risks caused by the unlawful or improper use of firearms.

Communicating with the Board

You may communicate with the Board or specific directors, including our independent directors and the members of our board committees, by submitting a letter addressed to the Board of Directors of Smith & Wesson Brands, Inc., c/o any specified individual director or directors, at our principal executive offices.

 

 

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Clawback Policy

We maintain a compensation recovery, or clawback policy.  See “Compensation Matters – Compensation Discussion and Analysis – Administration – Clawback Policy” for more information.

Certain Relationships

Unless delegated to the Compensation Committee by the Board, the Audit Committee charter requires the Audit Committee to review and approve all related party transactions and to review and make recommendations to the full Board, or approve, any contracts or other transactions with any of our current or former executive officers, including consulting arrangements, employment agreements, change-in-control agreements, termination arrangements, and loans to employees made or guaranteed by us. We have a policy that we will not enter into any such transaction unless the transaction is determined by our disinterested directors to be fair to us or is approved by our disinterested directors or by our stockholders. Any determination by our disinterested directors is based on a review of the particular transaction, applicable laws and regulations, our policies, and the Nasdaq listing standards. As appropriate, the disinterested directors of the applicable committees of the Board will consult with our legal counsel or internal auditor. There was no transaction during fiscal 2022, and there are no currently proposed transactions, in which we were or are to be a participant in which an executive officer, director, director nominee, a beneficial owner of 5% or more of our common stock, or any immediate family members of such persons had or will have a direct material interest.

We have entered into indemnification agreements with each of our directors and executive officers that require us to indemnify such individuals, to the fullest extent permitted by Nevada law, for certain liabilities to which they may become subject as a result of their affiliation with us.

DIRECTOR COMPENSATION

The Compensation Committee, with advice from its independent compensation consultant, determines, or recommends to the Board for determination, the compensation of our directors. We pay each non-employee director an annual retainer in the amount of $70,000. We also pay additional sums to our Chairman, Vice Chairman, Chairs of our committees, and members of our committees as follows:

 

 

In addition, each member of the Audit Committee receives an additional $1,500 per Audit Committee meeting attended in excess of seven meetings per year; each member of the Compensation Committee receives an additional $1,500 per Compensation Committee meeting attended in excess of six meetings per year; each member of the NCG Committee receives an additional $1,500 per NCG Committee meeting attended in excess of four meetings per year; and each member of the ESG Committee receives an additional $1,500 per ESG Committee meeting attended in excess of four meetings per year. We also reimburse each director for travel and related expenses incurred in connection with attending Board and committee meetings. Employees who also serve as directors receive no additional compensation for their services as a director.

 

 

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Each non-employee director receives a stock-based grant to acquire shares of our common stock on the date of his or her first appointment or election to the Board.  Each non-employee director also receives a stock-based grant at the meeting of the Board held immediately following our annual meeting of stockholders for that year. Stock-based grants were in the form of restricted stock units (“RSUs”) for 4,570 shares of common stock in fiscal 2022. Mssrs. Diaz and Suggs each received 5,356 shares of common stock in fiscal 2022 upon joining the Board. The RSUs vest one-twelfth each month.

The following table sets forth the compensation paid by us to each non-employee director for fiscal 2022. Mr. Smith did not receive any compensation for service on the Board.

 

 

We maintain stock ownership guidelines for our directors and executive officers. See “Compensation Matters — Administration — Stock Ownership and Retention Requirements.”

 

 

 

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COMPENSATION MATTERS

Pursuant to SEC rules, our stockholders are being asked to approve, on an advisory basis, the compensation of our NEOs as disclosed in this Proxy Statement. We have received high levels of support from our stockholders on advisory votes to approve executive compensation.

 

As described in the Compensation Discussion and Analysis section, we believe our compensation policies and procedures are competitive, focused on pay-for-performance principles, and aligned with the long-term interests of our stockholders. Our executive compensation philosophy is to pay base salaries to our executive officers at levels that, in the context of unfavorable industry factors beyond the control of management, enable us to attract, motivate, and retain highly qualified executives. Our executive compensation program is designed to link annual performance-based cash incentive compensation to the achievement of pre-established performance objectives, based primarily on our financial results and achievement of other corporate goals.

We believe our executive compensation program is designed appropriately and is working to ensure that management’s interests are aligned with our stockholders’ interests to support long-term value creation.

The advisory vote on this resolution is not intended to address any specific element of compensation; rather, it relates to the overall compensation of our NEOs, as well as the compensation philosophy, policies, and practices described in this Proxy Statement. Our stockholders may vote for or against, or to abstain from voting on, the following resolution:

RESOLVED, that the stockholders of the Company approve, on an advisory basis, the compensation of the Company’s named executive officers, as disclosed in the Compensation Discussion and Analysis, executive compensation tables, and narrative discussion set forth in this Proxy Statement.

This advisory vote will not be binding on the Board. The Compensation Committee will, however, take the outcome of the vote into account when considering future executive compensation decisions. We provide our stockholders with this advisory vote on an annual basis and expect that the next such vote will occur at the 2023 Annual Meeting.

 

 

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The Board is asking our stockholders to approve the Smith & Wesson Brands, Inc. 2022 Incentive Stock Plan (the “2022 LTI Plan”). The Board believes the 2022 LTI Plan will advance our long-term success by encouraging stock ownership among award recipients and further aligning the interests of award recipients with those of our stockholders.

BACKGROUND

Our stockholders previously approved the Smith & Wesson Holding Corporation 2013 Incentive Stock Plan (the “2013 LTI Plan”).  On July 12, 2022, the Board adopted the 2022 LTI Plan, subject to stockholder approval. The 2022 LTI Plan is intended to be used to make future awards that were previously made under the 2013 LTI Plan, modernize our incentive award grant practices, and set forth the principles our stockholders expect us to adhere to in designing and administering compensation programs.

If approved, the 2022 LTI Plan will become effective upon stockholder approval. No further awards will be made under the 2013 LTI Plan after the 2022 LTI Plan’s effective date. If our stockholders do not approve the 2022 LTI Plan, the 2013 LTI Plan will continue in its current state. However, the 2013 LTI Plan will expire in 2023, and we will lose a key tool we use to hire, retain, and motivate high-quality personnel.

Our recent annual use of equity has been well below industry guidelines published by ISS. From fiscal 2020 through fiscal 2022, our average gross burn rate (awards granted divided by shares outstanding) was approximately 1% per year. We are requesting an additional 1,000,000 shares be added under the 2022 LTI Plan, representing incremental potential dilution of 2.1% over the 10-year duration of the 2022 LTI Plan.   

KEY FEATURES

 

 

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POTENTIAL COMPENSATION SHARE NEEDS

In considering the appropriate number of shares of common stock to request under the 2022 LTI Plan, we reviewed our historical grant practices, our anticipated share needs with respect to future awards, our expectations for business growth, and our desire to have sufficient shares to make grants to prospective and current employees and non-employee directors for the next several years. We also considered equity overhang (the percentage of shares of our common stock subject to stock-based compensation grants, which was approximately 2.6% at April 30, 2022), our historical gross burn rate (awards granted divided by shares outstanding, which was approximately 1% for each year during the past three fiscal years), and our desire to limit the dilutive impact to our stockholders.

The table below shows the total potential equity awards that may be made under the 2022 LTI Plan, together with outstanding unvested awards.

 

 

SUMMARY OF 2022 LTI PLAN

The 2022 LTI Plan was adopted by the Board on July 12, 2022. The following summary of the 2022 LTI Plan is qualified in its entirety by reference to the full text of the 2022 LTI Plan. See Appendix A.

Administration and Eligibility

The 2022 LTI Plan is to be administered by the Compensation Committee. The Compensation Committee is authorized to select eligible persons to receive awards, grant awards, determine the type, number, and other terms and conditions of, and all other matters relating to, awards, prescribe award agreements, and the rules and regulations for the administration of the 2022 LTI Plan, construe and interpret the 2022 LTI Plan and award agreements, correct defects, supply omissions, or reconcile inconsistencies therein, and make all other decisions and determinations as the Compensation Committee may deem necessary or advisable for the administration of the 2022 LTI Plan. The Committee may delegate the performance of certain functions under the 2022 LTI Plan to members of the Board, our officers, or managers, among others.

As of the record date, approximately 170 officers, directors, employees, and consultants were eligible to participate in the 2022 LTI Plan.

 

 

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Award Types

Under the 2022 LTI Plan, the Compensation Committee may grant:

The Compensation Committee is authorized to grant (i) shares of common stock as a bonus free of restrictions, or to grant shares of common stock or other awards authorized under the 2022 LTI Plan in lieu of our obligations to pay cash under the 2022 LTI Plan or other plans or compensatory arrangements and (ii) awards that are denominated or payable in, valued by reference to, or otherwise based on or related to shares of common stock. The Compensation Committee determines the terms and conditions of such awards.

Shares Available for Issuance

The number of shares of common stock available for issuance under the 2022 LTI Plan on or after its effective date is 1,000,000 shares, plus any shares that are reserved and remain available for grant and delivery under the 2013 LTI Plan as of the date the 2022 LTI Plan is effective. Any shares that are subject to an award under the 2022 LTI Plan will be counted against this limit as one share for every one share granted.  

If any shares subject to (i) any award under the 2022 LTI Plan, or after the effective date of the 2022 LTI Plan, shares subject to any awards granted under the 2013 LTI Plan, are forfeited, expire, or otherwise terminate without issuance of such shares, or (ii) any award under the 2022 LTI Plan, or after the effective date of the 2022 LTI Plan, shares subject to any award granted under the 2013 LTI Plan, that could have been settled with shares is settled for cash or otherwise does not result in the issuance of all or a portion of the shares, the shares to which those awards were subject, will, to the extent of such forfeiture, expiration, termination, cash settlement, or non-issuance, again be available for delivery with respect to awards under the 2022 LTI Plan.  Any share that again becomes available for delivery pursuant to the provisions described above will be added back as one share.

To the extent any shares subject to an award are tendered and/or withheld in settlement of any exercise price and/or any tax withholding obligation associated with that award, those shares will not be available again for grant under the 2022 LTI Plan.

In the event of any merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, dividend in kind, or other like change in capital structure or distribution to our stockholders in the nature of a liquidating distribution or a distribution pursuant to a plan of dissolution, the Compensation Committee may make a proportionate adjustment to each outstanding award that the Compensation Committee considers appropriate, and the Compensation Committee has the authority to adjust: (i) the number and kind of securities that may be received in respect of any award under the 2022 LTI Plan; (ii) the number and kind of securities subject to outstanding awards; (iii) the exercise price of outstanding options; and (iv) the fair market value of the common stock and other value determinations applicable to outstanding awards, in each case in a manner that reflects equitably the effects of such event or transaction.

Outstanding awards granted under the 2013 LTI Plan will continue to be governed by the terms of the 2013 LTI Plan, but no awards may be made under the 2013 LTI Plan after the effective date of the 2022 LTI Plan.  Regardless of whether the 2022 LTI Plan is approved, we will retain the ability to grant awards under the 2013 LTI Plan until it has expired in accordance with its terms.

 

 

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Award Limits

The 2022 LTI Plan includes the following award limits:

The closing price of our common stock on Nasdaq on July 25, 2022 was $13.84 per share.

Other Terms of Awards

Awards may be settled in the form of cash, shares of common stock, other awards, or other property, in the discretion of the Compensation Committee. The Compensation Committee may require or permit participants to defer the settlement of all or part of an award in accordance with such terms and conditions as the Compensation Committee may establish. The Compensation Committee is authorized to place cash, shares of common stock, or other property in trusts or make other arrangements to provide for payment of our obligations under the 2022 LTI Plan. The Compensation Committee may condition any payment relating to an award on the withholding of taxes and may provide that a portion of any shares of common stock or other property to be distributed will be withheld to satisfy withholding and other tax obligations.

Awards generally are granted without a requirement that the participant pay consideration in the form of cash or property for the grant (as distinguished from the exercise), except to the extent required by law. The Compensation Committee may, however, grant awards in exchange for other awards under the 2022 LTI Plan, awards under other of our plans, or other rights to payment from us, and may grant awards in addition to and in tandem with such other awards or rights.

Dividend Equivalents

The Compensation Committee is authorized to grant dividend equivalents conferring on participants the right to receive, currently or on a deferred basis, cash, shares of common stock, other awards, or other property equal in value to dividends paid on a specific number of shares of common stock or other periodic payments. Dividend equivalents may be granted in connection with another award, may be paid currently or on a deferred basis and, if deferred, may be deemed to have been reinvested in additional shares of common stock, awards, or otherwise as specified by the Compensation Committee. Notwithstanding the foregoing, dividend equivalents credited in connection with an award that vests based on the achievement of performance goals will be subject to restrictions and risk of forfeiture to the same extent as the award with respect to which such dividend equivalents have been credited.

No award may permit the payment of any dividends or dividend equivalents with respect to a share of common stock underlying the award prior to the delivery of the underlying award (or shares underlying the award, if applicable), and then only to the extent in a manner that does not violate the requirements of Section 409A of the Tax Code or other applicable law.

 

 

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Change in Control

In the event of a “change in control” as defined in the 2022 LTI Plan, any restrictions, deferral of settlement, and forfeiture conditions applicable to an award will not lapse, and any performance goals and conditions applicable to an award will not be deemed to have been met, as of the time of the change in control, unless either (i) we are the surviving entity in the change in control and the award does not continue to be outstanding after the change in control on substantially the same terms and conditions as were applicable immediately prior to the change in control or (ii) the successor company does not assume or substitute for the applicable award, as determined in accordance with the terms of the 2022 LTI Plan. In the event of a change in control and either, (i) we are the surviving entity in the change in control and the award does not continue to be outstanding after the change in control on substantially the same terms and conditions as were applicable immediately prior to the change in control or (ii) the successor company does not assume or substitute for the applicable award, as determined in accordance with the terms of the 2022 LTI Plan, the applicable award agreement may provide that any restrictions, deferral of settlement, and forfeiture conditions applicable to an award will lapse, and any performance goals and conditions applicable to an award shall be deemed to have been met, as of the time of the change in control. If the award continues to be outstanding after the change in control on substantially the same terms and conditions as were applicable immediately prior to the change in control, or the successor company assumes or substitutes for the applicable award, as determined in accordance with the 2022 LTI Plan, the applicable award agreement may provide that with respect to each award held by such participant at the time of the change in control, in the event a participant’s employment is terminated without “cause” by our company or any related entity or by such successor company or by the participant for “good reason,” as those terms are defined in the 2022 LTI Plan, within 24 months following such change in control, any restrictions, deferral of settlement, and forfeiture conditions applicable to each such award will lapse, and any performance goals and conditions applicable to each such award will be deemed to have been met, as of the date on which the participant’s employment is terminated.

Subject to any limitations contained in the 2022 LTI Plan, including those described above, relating to the vesting of awards in the event of any merger, consolidation, or other reorganization in which we do not survive, or in the event of any “change in control,” the agreement relating to such transaction and/or the Compensation Committee may provide for (i) the continuation of the outstanding awards by us, if we are a surviving entity, (ii) the assumption or substitution for outstanding awards by the surviving entity or its parent or subsidiary pursuant to the provisions contained in the 2022 LTI Plan, (iii) full exercisability or vesting and accelerated expiration of the outstanding awards, or (iv) settlement of the value of the outstanding awards in cash or cash equivalents or other property followed by cancellation of such awards. The foregoing actions may be taken without the consent or agreement of a participant in the 2022 LTI Plan and without any requirement that all such participants be treated consistently.

Clawback of Benefits

We may (i) cause the cancellation of any award, (ii) require reimbursement by a participant of any previously paid award or part of an award, and (iii) effect any other right of recoupment of equity or other compensation provided under the 2022 LTI Plan in accordance with any of our policies that currently exists or that may from time to time be adopted or modified in the future by us in order to comply with the applicable laws or exchange requirements, which we refer to each as a “clawback policy.” By accepting an award, a participant is also agreeing to be bound by any clawback policy that currently exists or may from time to time be adopted or modified in the future to comply with applicable laws or stock exchange requirements. By accepting an award, a participant is further agreeing that all of the participant’s award agreements (and/or awards issued under the 2013 LTI Plan) may be unilaterally amended by us, without the participant’s consent, to the extent required to comply with any clawback policy, adopted or modified, in order to comply with applicable laws or exchange requirements.

Except as otherwise provided in any employment, consulting, or other agreement for the performance of services between the participant and us or a related entity or any severance agreement or plan covering the participant, if the participant, without our consent, violates a non-competition, non-solicitation, or non-disclosure covenant or agreement, as determined by a court of competent jurisdiction, then any outstanding, vested or unvested, earned or unearned portion of the award may, at the Compensation Committee’s discretion, be canceled.

 

 

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Amendment and Termination

The Board may amend, alter, suspend, discontinue, or terminate the 2022 LTI Plan or the Compensation Committee’s authority to grant awards without further stockholder approval, except that stockholder approval must be obtained for any amendment or alteration if such approval is required by law or regulation or under the rules of any stock exchange or quotation system on which shares of our common stock are then listed or quoted; provided that, except as otherwise permitted by the 2022 LTI Plan or an award agreement, without the consent of an affected participant, no such Board action may materially and adversely affect the rights of such participant under the terms of any previously granted and outstanding award.

The Compensation Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate any award theretofore granted and any award agreement relating thereto, except as otherwise provided in the 2022 LTI Plan; provided that, except as otherwise permitted by the 2022 LTI Plan or award agreement, without the consent of an affected participant, no such Compensation Committee or Board action may materially and adversely affect the rights of such participant under the terms of such award.

Life of the Plan

The 2022 LTI Plan will terminate at the earliest of (i) such time as no shares of common stock remain available for issuance, (ii) termination of the 2022 LTI Plan by the Board or (iii) the tenth anniversary of the effective date of the 2022 LTI Plan. Awards outstanding upon expiration of the 2022 LTI Plan will remain in effect until they have been exercised or terminated, or have expired.

United States Federal Income Tax Consequences

The following discussion is a general summary of the principal U.S. federal income tax consequences under U.S. law relating to awards granted to employees under the 2022 LTI Plan. This summary is not intended to be exhaustive and, among other things, does not describe state, local, or foreign income and other tax consequences. The federal income tax law and regulations are frequently amended, and participants should rely on their own tax counsel for advice regarding federal income tax treatment under the 2022 LTI Plan.

Stock Options and SARs. The grant of an option or SAR will create no tax consequences for the participant or us. A participant will generally have no taxable income upon exercise of an incentive stock option, except that the aggregate fair market value of the shares acquired minus the aggregate exercise price will count as “alternative minimum taxable income” which, depending on the facts, could result in the alternative minimum tax applying. Upon exercise of an option other than an incentive stock option, a participant generally must recognize ordinary income equal to the aggregate fair market value of the shares acquired minus the aggregate exercise price. Upon exercise of a SAR, a participant generally must recognize ordinary income equal to the value of the cash received (generally the difference between the fair market value of the common stock and the base price of the SAR). When disposing of shares acquired by exercise of an incentive stock option before the end of the later of the two-year anniversary of the grant of the option and the one-year anniversary of the exercise of the option (a “disqualifying disposition”), the participant generally must recognize ordinary income equal to the lesser of the aggregate fair market value of the shares at the date of exercise minus the aggregate exercise price or the amount realized upon the disposition of the shares minus the aggregate exercise price. Otherwise, a participant’s disposition of shares acquired upon the exercise of an option (including an incentive stock option other than pursuant to a disqualifying disposition) generally will result in a capital gain or loss.

Stock Awards.  Generally, the participant who receives a stock award will recognize ordinary compensation income at the time the shares of our common stock are received equal to the excess, if any, of the fair market value of the shares of common stock received over any amount paid by the participant in exchange for the shares of common stock. If, however, the shares of common stock are not vested when they are received under the 2022 LTI Plan (e.g., if the participant is required to work for a period of time in order to have the right to sell the shares of common stock), the participant generally will not recognize income until the shares of common stock become vested, at which time the participant will recognize ordinary compensation income equal to the excess, if any, of the fair market value of the shares of common stock

 

 

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on the date they become vested over any amount paid by the participant in exchange for the shares of common stock. A participant may, however, file an election with the Internal Revenue Service, within 30 days of his or her receipt of the award, to recognize ordinary compensation income, as of the date the recipient receives the award, equal to the excess, if any, of the fair market value of the shares of our common stock on the date the award is granted over any amount paid by the recipient in exchange for the shares of common stock. The participant’s basis for the determination of gain or loss upon the subsequent disposition of shares of our common stock acquired as awards will be the amount paid for the shares of common stock plus any ordinary income recognized either when the shares of common stock are received or when the shares of common stock become vested. Upon the disposition of any shares of our common stock received as a stock award under the 2022 LTI Plan, the difference between the sales price and the participant’s basis in the shares of common stock will be treated as a capital gain or loss and generally will be characterized as long-term capital gain or loss if the shares of common stock have been held for more the one year from the date as of which he or she would be required to recognize any compensation income. We generally will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income taxable to the participant, provided that amount constitutes an ordinary and necessary business expense for us, is reasonable in amount, and is not precluded by the deduction limitations imposed by Section 162(m) of the Code, and either the recipient includes that amount in income or we timely satisfy our reporting requirements with respect to that amount.

Dividend Equivalents.  Generally, the recipient of a dividend equivalent award will recognize ordinary compensation income at the time the dividend equivalent award is received equal to the fair market value of the amount received. We generally will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income that the recipient is required to recognize as a result of the dividend equivalent award, provided that the deduction is not otherwise disallowed under the Code.

Other Awards. Other awards under the 2022 LTI Plan generally will result in ordinary income to the participant at the later of the time of delivery of cash, shares, or other property underlying such awards, and the time that either the risk of forfeiture or restriction on transferability lapses on previously delivered cash, shares, or other awards.

Company Deduction. Except as discussed below, we are generally entitled to a tax deduction equal to the amount recognized as ordinary income by the participant in connection with options, SARs, or other awards, but not for amounts the participant recognizes as capital gain. Thus, we will not be entitled to any tax deduction with respect to an incentive stock option if the participant does not dispose of the shares in a disqualifying disposition. Our ability to claim a deduction will be contingent on applicable reporting requirements having been met and that the income is not an “excess parachute payment” within the meaning of Section 280G of the Tax Code and is not disallowed by reason of the $1 million limitation on certain executive compensation under Section 162(m) of the Tax Code.

Section 162(m) Limitation.  Section 162(m) of the Tax Code generally disallows a public company’s tax deduction for compensation to covered employees in excess of $1 million in any tax year. Compensation, for this purpose, includes taxable income attributable to awards granted under the 2022 LTI Plan and, therefore, some awards may not be fully deductible by us under Section 162(m) of the Tax Code.

Section 409A. Section 409A of the Tax Code provides special tax rules applicable to certain compensation arrangements that provide for a deferral of compensation. Failure to comply with those requirements will result in accelerated recognition of income for tax purposes along with an additional 20% penalty tax. The 2022 LTI Plan and awards thereunder are generally intended to be designed and administered so that any awards that are considered to be deferred compensation will not give rise to any negative tax consequences to the recipient under these provisions.

Plan Benefits

All future awards to directors, executive officers, and employees will be made at the discretion of the Compensation Committee or the Board. Therefore, we cannot determine future benefits under the 2022 LTI Plan at this time. Information regarding our recent practices with respect to equity-based compensation under our 2013 LTI Plan is presented elsewhere in this Proxy Statement and in the Form 10-K.

 

 

 

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COMPENSATION DISCUSSION AND ANALysis

EXECUTIVE SUMMARY

Named Executive Officers

This section describes our executive compensation program, outlines the core principles behind that program, and reviews the actions taken by the Compensation Committee concerning the fiscal 2022 compensation of the following named executive officers (“NEOs”):

 

 

Program Emphasis

Our executive compensation program emphasizes our pay-for-performance philosophy and is designed to help us attract, motivate, and retain highly qualified executives.

Compensation Governance and Practices

Our executive compensation program demonstrates our ongoing commitment to good corporate governance practices and aligns our executive officers’ interests with those of our stockholders.

 

Say-on-Pay Results

At the 2021 Annual Meeting, 97% of the votes cast were in favor of the advisory vote to approve executive compensation. We have received high levels of support from our stockholders on advisory votes to approve executive compensation.

 

 

 

 

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Summary of Fiscal 2022 Compensation Program

The following highlights aspects of our fiscal 2022 compensation program:

Factors Affecting Fiscal 2022 Compensation

Historically, the firearm industry has been very cyclical, with past expansions and contractions driven, in large part, by unpredictable political, economic, social, legislative, and regulatory factors beyond the control of industry participants and their management teams. For example, we experienced historic levels of demand for our products in parts of fiscal 2021 and fiscal 2022, in part, as a result of the impact of COVID-19 and the social unrest experienced in the United States during the summer of 2020. Since then, demand for our products has begun to return to more normalized levels, which adversely impacted our year-over-year financial and operating results in fiscal 2022. Despite tough comparisons, we achieved a number of significant accomplishments in fiscal 2022 that demonstrated progress toward our objective of being the undisputed market leader in the firearm industry.

EXECUTIVE COMPENSATION PROGRAM OVERVIEW

Philosophy and Objectives

Our executive compensation philosophy is to pay base salaries to our executive officers at levels that, in the context of unfavorable industry factors beyond the control of management, enable us to attract, motivate, and retain highly qualified executives. In addition, our executive compensation program is designed to link annual performance-based cash incentive compensation to the achievement of pre-established performance objectives, based primarily on our financial results. Similarly, our executive compensation program is designed so that stock-based compensation focuses our executive officers’ efforts on increasing stockholder value by aligning their economic interests with those of our stockholders. To that end, we generally intend for stock-based compensation to result in more limited or no rewards if the market price of our common stock does not appreciate or does not appreciate in an amount equal to or above certain levels, but may provide substantial rewards to our executive officers (as well as to our stockholders in general) if our common stock appreciates or appreciates in an amount equal to or above certain levels.

 

 

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Total compensation levels for our executive officers reflect corporate positions, responsibilities, and the achievement of performance objectives. As a result of our “pay-for-performance” philosophy, compensation levels may vary significantly from year-to-year and among our executive officers.

We believe that the average compensation levels for our executives, including our NEOs, align with our “pay-for-performance” philosophy and have been consistent with our performance.

Goals

Our executive compensation program’s objectives include the following:

ADMINISTRATION

The Board has appointed a Compensation Committee, consisting exclusively of independent directors.  The charter of the Compensation Committee authorizes the Compensation Committee to determine and approve, or to make recommendations to the Board with respect to, the compensation of our CEO and other executive officers.  The Board has authorized the Compensation Committee to make all decisions with respect to executive compensation.  Among other things, the Compensation Committee is authorized to determine and approve the base salary of our CEO and other executive officers.  Additionally, the Compensation Committee establishes annual cash and stock-based incentive compensation programs for our CEO and other executive officers and provides our executives with variable compensation opportunities, a majority of which is based on the achievement of key operating measures determined at the beginning of the fiscal year. Once the Compensation Committee determines key operating measures for the upcoming fiscal year, the measures generally are not subject to material changes during the fiscal year.  The Compensation Committee, with advice from its independent compensation consultant, also determines the compensation of our directors.

Role of the Compensation Committee and our CEO

The Compensation Committee determines the compensation of our executive officers, including our CEO, at least annually in light of the goals and objectives of that fiscal year’s compensation program.  Together with our CEO, the Compensation Committee annually assesses the performance of our other executive officers. After receiving recommendations from our CEO, the Compensation Committee, with input from its independent compensation consultant, determines the compensation of our other executive officers.

 

 

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In determining executive officer compensation levels, the Compensation Committee periodically reviews compensation levels of executives of companies deemed to be generally similar to ours based on their size, industry, and competitive factors. The Compensation Committee uses this peer group information, as well as published executive compensation survey data from a broader group of companies with similar revenue to ours, as points of reference; however, the Compensation Committee does not benchmark or target our compensation levels to a specific percentile against this competitive information.

At the invitation of the Compensation Committee, our CEO may attend portions of Compensation Committee meetings, except those at which his compensation is discussed or determined. This enables the Compensation Committee to review with our CEO the goals that the CEO regards as important to achieving our success and to receive our CEO’s assessment of the performance of, and goals for, our other executive officers. However, the Compensation Committee, with the assistance of its independent compensation consultant, rather than our CEO, determines goals, targets, and compensation for our other executives.

Role of the Independent Compensation Consultant

The Compensation Committee has sole discretion to retain a compensation consultant and is directly responsible for the appointment, compensation, and oversight of the work of the compensation consultant. The Compensation Committee retains a compensation consultant to assist in setting the design and goals of the executive compensation program, to review trends in executive compensation, to identify relevant peer companies, and to conduct an assessment and analysis of executive market compensation.  The compensation consultant reports directly to the Compensation Committee.

Compensia, Inc. served as the Compensation Committee’s independent compensation consultant for fiscal 2022. For fiscal 2022, the compensation consultant identified for the Compensation Committee peer group companies, provided an assessment and analysis of those companies, determined the positioning of each executive officer’s compensation by element among the peer companies and the survey data, developed recommendations and guidelines for the structure of our executive compensation program, reviewed the overall compensation package, and advised the Compensation Committee regarding the appropriateness of our executive compensation program. In addressing Compensia’s independence in light of applicable SEC rules and Nasdaq standards, the Compensation Committee considered relevant factors and concluded that Compensia is independent and the engagement would not raise any conflicts of interest under the applicable rules and standards.

Peer Group for Fiscal 2022

The Compensation Committee’s independent compensation consultant identified for the Compensation Committee a peer group for fiscal 2022. In selecting peer companies for the Compensation Committee’s final review, the consultant identified companies deemed generally relevant to us with a focus on those involved in durables and apparel and consumer products companies, especially those with high dollar value products. The consultant then supplemented the list with companies involved in manufacturing.  Within these industries, the consultant used a “rules-based” approach to select companies based on similar financial characteristics; specifically, it targeted companies with revenue from approximately $500 million to $2 billion and a market capitalization from approximately $300 million to $3 billion.

 

 

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COMPENSATION ELEMENTS

Our executive compensation program consists primarily of base salary, annual performance-based cash incentive compensation opportunities, stock-based compensation, and severance benefits, together with health and welfare benefits generally available to most employees and our other executives, and limited perquisites. The Compensation Committee considers each element of compensation individually and collectively with other elements of compensation when establishing the various forms, elements, and levels of compensation for our executive officers.

Our fiscal 2022 executive compensation program included the following direct compensation components: base salary, annual performance-based cash incentives, and stock-based compensation.

 

 

 

 

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Base Salaries

Base salaries are designed to provide competitive levels of compensation to our executives based on their position, responsibilities, skills, experience, performance, and contributions. The Compensation Committee also considers individual performance and contributions, future potential, competitive salary levels for comparable positions at other companies, salary levels relative to other internal positions, corporate needs, and the advice of its independent compensation consultant. The Compensation Committee’s evaluation of these factors is subjective, and it does not assign a particular weight to any one factor.

Given the high-profile nature of our industry, it has become increasingly difficult to attract, motivate, and retain highly qualified individuals willing to be associated with us and our industry. The Compensation Committee has become increasingly aware of the impact this factor has had not only on existing and potential future employees, but also the pressures this factor places on the families of these individuals.

Fiscal 2022 Base Salaries.  The Compensation Committee generally sets base salaries for our executive officers at the beginning of the fiscal year. Based on an evaluation of the factors listed above, the Compensation Committee’s desire to reward and retain our executive officers, the general industry range for base salary increases, and the competitiveness of our base salaries as measured against the peer and market data, the Compensation Committee set our NEOs’ annual base salaries for fiscal 2022 as follows:

 

 

 

Annual Performance-Based Cash Incentive Compensation

Annual performance-based cash incentive compensation is designed to motivate our executives and reward the achievement of specific performance goals that support our business strategy.  In designing the cash incentive compensation plan for any particular year or period, the Compensation Committee establishes performance objectives, based primarily on our financial results and the achievement of other corporate goals. In limited cases, the Compensation Committee may consider individual objectives, responsibilities, and performance in determining the amounts payable, but it did not do so in fiscal 2022.

The Compensation Committee determines the target annual compensation opportunities for our executive officers, with these opportunities being subject to change from year to year based on its periodic review of economic, industry, and competitive data; changes in individual responsibilities; and our overall compensation philosophy. The Compensation Committee confirms, with its independent compensation consultant and our independent audit firm, the achievement of the objectives and approves the payment, if any, of annual cash incentive compensation in the first quarter of the following fiscal year.

 

 

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Fiscal 2022 Executive Annual Cash Incentive Program. In April 2021, the Compensation Committee established the 2022 Executive Annual Bonus Plan, a performance-based cash incentive compensation plan for our executives, including our NEOs (the “2022 Bonus Plan”). The 2022 Bonus Plan provided each participant an opportunity to earn cash incentive compensation based on attaining pre-established objective financial performance metrics and, from time to time, individual performance goals. Each participant was assigned an incentive bonus opportunity expressed as a percentage of base pay and objective financial performance metrics were established with varying weightings totaling 100%. For each metric, threshold, budget, target, and maximum performance levels were set. Final cash incentive compensation was calculated by multiplying each participant’s target percentage by the weighted average percentage calculated for each metric. Cash incentive compensation could not exceed 200% of a participant’s target bonus opportunity, and eligibility for payment of any award was subject to the participant continuing to be employed by us through the end of the fiscal year.

Fiscal 2022 Performance Metrics.  For fiscal 2022, the Compensation Committee established Net Sales and Adjusted EBITDAS as the performance metrics for our executives, with a weighting of 40% for Net Sales and 60% for Adjusted EBITDAS.  Adjusted EBITDAS also served as the threshold for which the failure to achieve this performance metric would result in no bonus payments regardless of the achievement of the other performance metric.

The target award percentages for fiscal 2022 as a percentage of base pay were 100% for Mr. Smith, 70% for Ms. McPherson, and 65% for Messrs. Maxwell and Cicero and Ms. Cupero. There were no individual performance goals for fiscal 2022.

For these purposes, “Adjusted EBITDAS” means our net income as reported in the Form 10-K adding back interest, taxes, depreciation, amortization, non-cash stock compensation expense and any nonrecurring expenses as determined by the Compensation Committee as set forth in the 2022 Bonus Plan or at any time thereafter. For fiscal 2022, the Compensation Committee determined to include the following nonrecurring expenses: (i) accelerated expenses related to the refinance of our Credit Facility; (ii) fair value inventory step-up and backlog expense; (iii) all acquisition or merger related expenses associated with negotiating, conducting diligence, and closing for any acquired company or merger; (iv) any costs related to the spin-off of the Outdoor Products & Accessories division; (v) changes in contingent consideration; (vi) impairment charges for goodwill, tangible, or intangible assets; (vii) costs incurred relating to shareholder activism; (viii) any gain or loss incurred on a sale or disposal of a product line, which sale or disposal is approved by the Board; (ix) costs directly related to inventory that cannot be sold or otherwise used, which unsaleable or unusable inventory is the result of a change in Federal firearms law; (x) any costs/impact related to the implementation of any new accounting pronouncements that become effective during the fiscal year; and (xi) any costs associated with the relocation of operations to Maryville, TN, including but not limited to severance, relocation, recruiting, construction, and duplication of costs. To the extent practicable, each amount was calculated based upon the numbers used in the audited financial statements and, if possible, in the same amount as reported in the Form 10-K.

The financial performance metrics established under the 2022 Bonus Plan were as follows:

 

 

The failure to reach the threshold metric of at least $217,638,000, or 59.4% of target, for the Adjusted EBITDAS metric would result in no bonus payments regardless of the achievement of the Net Sales metric.

 

 

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In fiscal 2022, Net Sales and Adjusted EBITDAS, for purposes of compensation, were $864.0 million and $299.6 million, respectively, compared with $1.1 billion and $366.6 million, respectively, in fiscal 2021. We experienced historic levels of demand for our products in parts of fiscal 2021 and fiscal 2022, in part because of the impact of COVID-19 and the social unrest experienced in the U.S. during the summer of 2020.  Since then, and particularly in the second half of fiscal 2022, demand for our products has begun to return to more normalized levels, which adversely impacted our year-over-year financial and operating results in fiscal 2022. Despite tough comparisons, we achieved a number of significant accomplishments in fiscal 2022 that demonstrated progress toward our objective of being the undisputed market leader in the firearm industry.

The table below sets forth for each NEO the annual fiscal 2022 base salary, the target bonus percentage, the annualized target cash bonus opportunity, and the actual bonus paid for fiscal 2022 reflected as a percentage of target bonus opportunity and in cash:

 

 

Stock-Based Compensation

Our stock-based compensation is equity based and includes both RSUs and PSUs. We believe stock-based compensation is critical in aligning our executives’ and stockholders’ interests. Together, we believe that these incentives focus our executives on making decisions that will benefit our stockholders.

The Compensation Committee believes in tying executive rewards directly to our long-term success and focusing our executives’ efforts on increasing stockholder value by aligning their interests with those of our stockholders. To that end, our stock-based compensation generally is intended to result in more limited rewards if the price of our common stock does not appreciate or does not appreciate above certain levels, but may provide substantial rewards if our common stock appreciates above certain levels. Our stock-based compensation also enables our executives to earn and maintain a significant stock ownership position in us. The amount of stock-based compensation granted takes into account our performance; the grant date value of awards; previous grants to an executive officer; an executive officer’s position; the performance, contributions, skills, experience, and responsibilities of the executive officer; the cost to us; the executive officer’s total compensation in relation to peers at our peer companies; and other factors that the Compensation Committee deems necessary or appropriate from time to time, including retention, overhang, and burn rate.

The Compensation Committee generally sets the vesting schedule for RSUs over multiple year periods to encourage executive retention. The Compensation Committee generally establishes multi-year performance requirements for the earning of PSUs to reward long-term Company performance. PSUs are earned only if the relative performance of our common stock achieves the then-applicable pre-established metric compared with the RUT’s performance. In addition, we generally maintain a value cap on PSUs.

 

 

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Given the high-profile nature of our industry, it has become increasingly difficult to attract, motivate, and retain highly qualified individuals willing to be associated with us and our industry.  The Compensation Committee continues to recognize the importance of long-term incentive stock-based compensation as a factor in executive compensation.

Timing of Stock-Based Awards.  The Compensation Committee sets the value of RSUs and PSUs at the fair market value of our common stock, which is the closing price of our common stock on Nasdaq on the effective date of grant. The Compensation Committee generally grants stock-based compensation to our executive officers annually within the same time frame each year. In the case of new hires, grant prices generally are determined by the closing price of our common stock on the 15th day of the month following the date on which the employee reports for service. The Compensation Committee authorizes our CEO to grant stock-based compensation to employees who are not executive officers, subject to limitations on the amount and an obligation to subsequently report the grant activity to the Compensation Committee.

Fiscal 2022 Stock-Based Compensation.  During fiscal 2022, grants of annual stock-based compensation to our NEOs consisted of RSUs and PSUs, with a weighting of 40% for RSUs and 60% for PSUs.  In determining the equity awards granted to each executive officer, the Compensation Committee considered the factors discussed above.  

During fiscal 2022, we granted the following RSUs and PSUs to our NEOs:

 

 

RSUs vest one-fourth following each of the first, second, third, and fourth anniversaries of the grant date.

PSUs are earned and vest based on the relative performance of our common stock against the RUT over the approximately three-year performance period following the date of grant. If the relative performance of our common stock (measured based on the average closing price of our common stock during the 90-calendar-day-period preceding approximately the third anniversary of the date of grant against the average closing price of our common stock during the 90-calendar-day-period immediately following the date of grant) does not equal or exceed the relative performance of the RUT (measured based on the average closing price of the RUT during the 90-calendar-day-period preceding approximately the third anniversary of the date of grant against the average closing price of the RUT during the 90-calendar-day-period immediately following the date of grant), then no PSUs subject to the awards will be earned and vest. If the relative performance of our common stock equals the relative performance of the RUT, then 38% of the PSUs subject to the awards (at target) will be earned and vest, or the threshold award. If the relative performance of our common stock exceeds the relative performance of the RUT by up to five points, then the PSUs subject to the awards will be earned and vest on a straight-line basis from the threshold award level up to the target award level, with 100% of the PSUs subject to the awards (the target number of PSUs) being earned and vesting if the relative performance of our common stock exceeds the relative performance of the RUT by five points. If the relative performance of our common stock exceeds the relative performance of the RUT by over five points up to a level of 10 points, then the PSUs subject to the awards will be earned and vest on a straight-line basis up to the maximum award, with 200% of the PSUs subject to the awards (the maximum number of PSUs) being earned and vesting if the relative performance of our common stock exceeds the relative performance of the RUT by 10 points or more.

 

 

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The underlying shares of our common stock earned, if any, relating to PSUs will be delivered as soon as practical after the ending date of the performance period and confirmation by the Compensation Committee of the performance achievement. The maximum number of shares that can be delivered with respect to the fiscal 2022 PSU awards is limited to a dollar value, determined as of the vesting date, of 600% of the grant date value.

Upon a change in control of the Company prior to the three year anniversary of the date of any PSU grant, each PSU award recipient will earn a number of PSUs subject to the award in accordance with the formula described above, provided that (i) the relative performance of our common stock will be measured based on the consideration offered for one share of our common stock in the change in control to calculate our market capitalization (or in the event of a change in control that does not involve an acquisition of our stock, based on the trading price of our common stock on the date of the change in control to calculate our market capitalization) against the average closing price of our common stock during the 90-calendar-day period immediately following the date of grant; and (ii) the relative performance of the RUT will be measured based on the average closing price of the RUT during the 90-calendar-day-period immediately prior to the change in control against the average closing price of the RUT during the 90-calendar-day-period immediately following the date of grant. The PSUs earned pursuant to the formula described above will then be converted into RSUs that will vest upon the earlier of (i) a qualifying termination of employment or (ii) the original vesting date.

2019 PSU Payout.  The PSUs granted in fiscal 2019 to our executive officers, which had a three-year performance period ending May 1, 2022, were earned because our market capitalization combined with the market capitalization of AOUT met the maximum performance requirements compared with the RUT. Over the three-year performance period, our market capitalization combined with the market capitalization of AOUT appreciated 87.5% while the RUT appreciated 30.6%. As a result, the Compensation Committee confirmed that this outperformance resulted in the PSUs granted in fiscal 2019 being earned, and therefore, our NEOs that had received the 2019 award received 200.0% of the target shares of common stock underlying the PSUs granted in fiscal 2019.

Adjustments for the Separation.  In connection with the Separation, our outstanding stock-based awards were adjusted in a manner intended to maintain the intrinsic value of the RSUs and PSUs immediately prior to the Separation. The RSUs and PSUs held by our directors and executives generally were converted into RSUs or PSUs of us and AOUT, such that each such holder would (i) continue to hold the existing RSU or PSU in us covering the same number of shares of our common stock that were subject to the RSU or PSU prior to the Separation and (ii) receive an identical RSU or PSU covering one share of AOUT common stock for each four shares of our common stock covered by the RSU or PSU in us, resulting in the RSUs or PSUs for us, and AOUT, having a combined intrinsic value immediately after the Separation as before the Separation, taking into account any necessary adjustments to the exercise price to maintain such intrinsic value. In addition, to the extent the existing award of us is subject to the achievement of certain company performance-based target goals, appropriate adjustments were made to such target goals and incorporated into the new awards to reflect the changes to the businesses as a result of the Separation. The number of shares covered by RSUs in us held by other employees were adjusted so that the RSUs had the same intrinsic value immediately following the Separation as before the Separation. To the extent the existing award is subject to vesting based upon continued service, the new awards also remained subject to the same vesting conditions based upon continued employment with the holder’s post-Separation employer.

Benefits and Perquisites

Our executives are eligible to participate in those health, welfare, and retirement plans generally available to employees who meet applicable eligibility requirements – including our profit sharing, 401(k), employee stock purchase, and medical and disability plans. In addition, from time to time, we may provide our executive officers with other benefits and perquisites that we believe are reasonable – including severance and change-in-control benefits, car allowances, housing allowances, relocation assistance, a nonqualified supplemental deferred compensation plan, and insurance premium reimbursement.

 

 

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We do not view perquisites and other personal benefits as a significant element of our executive compensation program, but believe they can be useful in attracting, motivating, and retaining executive talent. We believe these additional benefits may assist our executives in performing their duties and provide time efficiencies in appropriate circumstances. We may provide additional benefits and perquisites to our executives in the future as an element of their overall compensation. All future practices will be approved and subject to periodic review by the Compensation Committee.

ADMINISTRATION

Consideration of Risk in Compensation Policies

We have assessed the compensation policies and practices with respect to our employees, including our executive officers, and concluded that they do not create risks that are reasonably likely to have a material adverse effect on us.

Deductibility of Executive Compensation

Section 162(m) of the Code generally limits our deductibility, for federal income tax purposes, of compensation paid to each of our NEOs in excess of $1 million per person per year.

Taxation of “Parachute” Payments

Sections 280G and 4999 of the Code provide that executive officers and directors and certain other service providers may be subject to significant additional taxes if they receive payments or benefits in connection with a change in control of a company that exceeds certain prescribed limits and that the company (or a successor) may forfeit a deduction on the amounts subject to this additional tax. We did not provide any executive officer, including any NEO, with a “gross-up” or other reimbursement payment for any tax liability that the executive officer might owe as a result of the application of Sections 280G and 4999 during fiscal 2022, and we have not agreed and are not otherwise obligated to provide any executive officer with such a “gross-up” or other reimbursement.

Derivative Trading and Hedging

See “Board and Governance Matters—Additional Governance Matters—Director and Officer Derivative Trading and Hedging.”

Clawback Policy

We maintain a compensation recovery, or clawback, policy. In the event we are required to restate our financial results as a result of a material noncompliance by us with any financial reporting requirement under the federal securities laws, we will have the right to use reasonable efforts to recover from any current or former executive officer who received incentive compensation (whether cash or equity) from us during the three-year period preceding the date on which we were required to prepare the accounting restatement, any excess incentive compensation awarded as a result of the misstatement. This policy is administered by the Compensation Committee. If final rules are adopted by the SEC regarding clawback requirements under the Dodd-Frank Act, we will review this policy and make any amendments as necessary to comply with the new rules.

 

 

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Stock Ownership and Retention Requirements

We maintain stock ownership guidelines for our non-employee directors and executive officers. Our non-employee directors and executive officers are required to own shares of our common stock or share equivalents with a value equal to at least the lesser of the following:

 

 

Each individual has five years from the date of his or her appointment as a director or an executive officer to achieve the required ownership levels. For these purposes, stock ownership generally includes shares directly owned by the individual (including any shares over which the individual has sole ownership, voting, or investment power); shares owned by the individual’s minor children and spouse and by other related individuals and entities over whose shares the individual has custody, voting control, or power of disposition; shares underlying RSUs that have vested and are deliverable or will be vested and deliverable within 60 days; shares underlying PSUs that have vested, but are not deliverable within 60 days if the performance requirements have been satisfied; and shares held in trust for the benefit of the individual. Failure to satisfy the required ownership level may result in the ineligibility of the individual to receive stock-based compensation, in the case of an executive officer or director, or inability to be a nominee for election to the Board, in the case of a director.

Employment Agreements and Severance Arrangements

We do not maintain employment agreements with any of our NEOs, except Mr. Smith.  

Mr. Smith.  On April 4, 2020, we entered into an employment agreement with Mr. Smith, pursuant to which he is (a) entitled to an annual base salary that is subject to annual review by the Board and (b) eligible to participate in our executive compensation programs, to receive a discretionary annual cash bonus under our annual cash incentive program as determined by the Board, and to receive annual and periodic stock-based compensation awards as determined by the Board. Mr. Smith is entitled to receive other standard benefits, including a car allowance of $1,500 per month; participation in any group health insurance, pension, retirement, vacation, expense reimbursement, relocation program, and other plans, programs, and benefits approved by the Board and made available from time to time to our other executives; and certain insurance benefits.

If we unilaterally terminate Mr. Smith’s employment without cause, he will receive (i) his base salary for 18 months after the termination; (ii) a pro rata portion of his annual cash bonus for the fiscal year in which the termination occurs to the extent earned under the then applicable executive annual cash incentive program; (iii) a car allowance for 18 months after termination; (iv) at our option, either (x) coverage under our medical plan to the extent provided for him pursuant to his employment agreement at termination, such benefits to be received for 18 months thereafter or (y) reimbursement for the COBRA premium for such coverage through the earlier of the 18-month period or the COBRA eligibility period; and (v) a vested pro rata portion of stock-based awards scheduled to vest in the fiscal year of the termination.

If Mr. Smith’s employment is terminated by reason of his death or disability, if Mr. Smith unilaterally terminates his employment, or if Mr. Smith engages in an act or acts involving a crime, moral turpitude, fraud or dishonesty, or he willfully violates in a material respect our Corporate Governance Guidelines, Code of Conduct, or Code of Ethics for the Chief Executive Officer and Senior Financial Officers, he will receive no further base compensation under his employment agreement.

 

 

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If Mr. Smith’s employment is terminated by reason of his death or disability, if we unilaterally terminate Mr. Smith’s employment without cause, or if Mr. Smith voluntarily terminates his employment, or is terminated by us, following a qualifying change in control event as described below, he will receive, for the fiscal year of the notice of termination, any earned bonus, on a pro-rated basis, based on the performance goals actually achieved for the fiscal year of the notice of termination, as determined in the sole discretion of the Board, at the time such bonuses are paid to our other employees.

The agreement provides that, in the event of a change in control (as defined therein), Mr. Smith may, at his option and upon written notice to us, terminate his employment, unless (i) the provisions of his employment agreement remain in full force and effect and (ii) he suffers no reduction in his status, duties, authority, or compensation following the change in control, provided that he will be considered to suffer a reduction in his status, duties, or authority if, after the change in control, (a) he is not the CEO of the company that succeeds to our business; (b) such company’s stock is not listed on a national stock exchange; or (c) such company terminates his employment or reduces his status, duties, authority, or compensation within one year of the change in control. If, within one year of a change of control, Mr. Smith terminates his employment because of the change in control following which the employment agreement does not remain in full force and effect or his status, duties, authority, or compensation have been reduced, or such company terminates Mr. Smith, he will receive (A) his base salary for 18 months; (B) an amount equal to 150% of the average of his cash bonus paid for each of the two fiscal years immediately preceding his termination, which will be paid over the 18-month period; (C) his car allowance for 18 months; and (D) at our option, either (x) coverage under our medical plan to the extent provided for him at the date of termination for 18 months or (y) reimbursement for the COBRA premium for such coverage through the earlier of such 18-month period or the COBRA eligibility period. In addition, all unvested stock-based compensation held by Mr. Smith in his capacity as an employee on the effective date of the termination will vest as of the effective date of such termination.  

The employment agreement includes non-competition and non-solicitation provisions that apply for 18 months following termination.

Mr. Cicero.  On May 24, 2021, in connection with Mr. Cicero’s retirement, we and Mr. Cicero entered into a separation and release agreement. Pursuant to the agreement, Mr. Cicero’s roles as our General Counsel, Chief Compliance Officer, and Secretary ceased on August 1, 2021 (the “Transition Date”); however, from the Transition Date through September 10, 2021 (the “Termination Date”), he continued to be employed by us and assisted with respect to all transition matters. Pursuant to the agreement, we agreed to pay Mr. Cicero his annual base salary for a period of 26 weeks in accordance with our normal payroll processing and the cost of COBRA premiums until the earlier of 26 weeks following the Termination Date, or the termination of his rights under COBRA. The treatment of Mr. Cicero’s outstanding equity awards is governed by the terms and conditions set forth in his existing equity award agreements and the applicable equity award plan under which the awards were granted.

Severance Plan Benefits

The Smith & Wesson Brands, Inc. Executive Severance Pay Plan (the “Executive Severance Plan”) is intended to provide severance pay to certain eligible executives whose employment is terminated under certain circumstances. All of our NEOs participated in the Executive Severance Plan during fiscal 2022, except Mr. Smith, whose severance eligibility is covered under other agreements. In addition, following his retirement, Mr. Cicero was covered under his separation agreement.

Subject to certain conditions, if we terminate a participating executive without good cause (other than due to death or disability) or a participating executive resigns for good reason (each as defined therein), he or she will receive certain payments and benefits, subject to the terms and conditions set out in the Executive Severance Plan. These payments and benefits include continuation of base salary, payment of a pro rata portion of his or her cash incentive bonus, and reimbursement for the cost of healthcare continuation coverage for the participating executive and his or her eligible dependents. In addition, if we terminate a participating executive during a Potential Change in Control Protection Period or Change in Control Protection Period or a participating executive resigns following an Adverse Change in Control Effect (each

 

 

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as defined therein), he or she will receive certain payments and benefits, subject to the terms and conditions set out in the Executive Severance Plan. These payments and benefits include continuation of base salary for six months, a lump sum cash payment equal to the average of the cash incentive bonuses paid to the executive for each of the preceding two fiscal years, vesting of all stock-based compensation granted to the executive in his or her capacity as an employee, and reimbursement for the cost of healthcare continuation coverage for the participating executive and his or her eligible dependents for six months. See “Potential Payments Upon Termination or Change in Control.”

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis included in this Proxy Statement and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

Compensation Committee:  Barry Monheit, Chairman; Anita D. Britt; Fred M. Diaz; and John B. Furman.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 2022, Messrs. Diaz, Furman, and Monheit and Ms. Britt served on the Compensation Committee. None of these individuals had any material contractual or other relationships with us during the fiscal year, except as directors. During fiscal 2022, none of our executive officers served on the compensation committee or board of directors of any entity whose executive officers serve as a member of the Board or Compensation Committee.

 

 

 

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EXECUTIVE COMPENSATION

FISCAL 2022 SUMMARY COMPENSATION TABLE

The following table sets forth, for fiscal 2022, 2021, and 2020, information with respect to compensation for services in all capacities to us and our subsidiaries earned by our NEOs, and one additional individual who served as an executive officer during fiscal 2021 but was not serving as an executive officer at the end of fiscal 2022.