UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class |
Trading Symbol |
Name of exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The registrant had
SMITH & WESSON BRANDS, INC.
Quarterly Report on Form 10-Q
For the Three and Nine Months Ended January 31, 2023 and 2022
TABLE OF CONTENTS
Smith & Wesson®, S&W®, M&P®, M&P Shield®, Performance Center®, Airlite®, Airweight®, American Guardians®, America’s Master Gunmaker®, Armornite®, Arrow®, Aurora®, Aurora-II®, Blast Jacket®, Bodyguard®, Carry Comp®, Chiefs Special®, Club 1852®, Compass®, Competitor®, Contender®, CSX®, Dagger®, Dimension®, Encore®, E-Series®, EZ®, Flextech®, G-Core®, Gemtech®, Gemtech Suppressors®, Gemtech World-Class Silencers®, GM®, GMT-Halo®, Governor®, Integra®, Lady Smith®, Lever Lock®, LOC Locking Optimized Components®, Lunar®, M2.0®, Mag Express®, Magnum®, Maxi-Hunter®, Mist-22®, Mountain Gun®, Number 13®, PC®, Power Rod®, Protected by Smith & Wesson®, Put A Legend On Your Line®, QLA®, Quick Load Accurizer®, Quickmount®, Shield®, Smith & Wesson Collectors Association®, Smith & Wesson Performance Center®, Smith & Wesson Precision Components®, Speed Breech®, Speed Breach XT®, SW22 Victory®, Swing Hammer®, T/C®, T/CR22®, T17®, The Professional’s Choice for Decades®, The S&W Bench®, The Sigma Series®, Thompson/Center®, Trek®, Triumph®, U-View®, Viper®, and Weather Shield® are some of the registered U.S. trademarks of our company or one of our subsidiaries. Abyss™, Neutron™, GVAC™, TEMPO™, OXBOW™, ETM™, FlexMag™, Silence Is Golden™, Smith & Wesson Response™, Smith & Wesson Academy™, M&P FPC™, C.O.R.E.™, SW Equalizer™, GM-S1™, Redux™, Oath™, Nerve™, Empowering Americans™, GunSmarts™, S&W500™, SDVE™, SW1911™, Volunteer™, Cheap Shot™, Impact!™, Impact!SB™, Katahdin™, Maxi-Ball™, Natural Lube 1000 Plus™, Pro Hunter™, Pro-Hunter FX™, Pro Hunter XT™, Quickshot™, Speed Shots™, Strike™, Super Glide™, Venture™, Alpine™, One™, Patrolman™, and Tracker™ are some of the unregistered trademarks of our company or one of our subsidiaries. This report also may contain trademarks and trade names of other companies.
Statement Regarding Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding plans to move our headquarters and significant of our manufacturing operations to a new facility being constructed in Maryville, Tennessee; lease payments for future periods; estimated amortization expense of intangible assets for future periods; our intention to terminate the Sublease (as defined herein) on or around the effective date of the Assignment and Assumption Agreement (as defined herein); negotiations with our lenders to transition from LIBOR to SOFR affecting our future borrowing rates; the outcome of the lawsuits to which we are subject and their effect on us; our belief that the claims asserted by Gemini (as defined herein) and plaintiffs in a putative class action against us have no merit and that we intend to aggressively defend these actions; our belief with respect to certain matters described in the Commitments and Contingencies – Litigation section, that the allegations are unfounded and that any incident and any results from them or any injuries were due to negligence or misuse of the firearm by the claimant or a third party; our belief that our accruals for product liability cases and claims are a reasonable quantitative measure of the cost to us of product liability cases and claims; our belief that we have provided adequate accruals for defense costs; our intention in connection with the Project Agreement (as defined herein) to incur, or cause to be incurred, no less than $120.0 million in aggregate capital expenditures on or before December 31, 2025, create no less than 620 new jobs, and sustain an average hourly wage of at least $25.97 at the facility; our intention, with respect to assets associated with our assembly operations in Massachusetts and distribution operations in Missouri, to either move those assets to Tennessee at the appropriate time or sell or sublease those assets that will not be moved; our expectation that subsequent to the Relocation, our Massachusetts facility will continue to remain an important part of our manufacturing activities with significant portions of the operations being unaffected by the Relocation; our intention, at or near the conclusion of our Connecticut building lease in May 2024, to relocate a portion of the plastic injection molding operations to Tennessee and evaluate selling the remaining molding operations utilized in our Connecticut operations to a third party; our inventory levels, both internally and in the distribution channel, in excess of demand may negatively impact future operating results; our ability to utilize process improvements to mitigate inflationary impacts in future periods will likely resume only once the Relocation is completed; our expectation that our inventory levels will decline by the end of the fiscal year due to normal seasonality, but will remain elevated as we begin our transition to our new facility in Tennessee; our belief that overall firearm demand remains healthy, as indicated by recent adjusted NICS data; our expectation to incur capital expenditures in connection with the construction and equipping of the new facility in Maryville, Tennessee in an aggregate amount of approximately $160.0 million to $170.0 million through the end of fiscal 2024; our expectation for capital expenditures in fiscal 2023, including spending related to the Relocation; factors affecting our future capital requirements; availability of equity or debt financing on acceptable terms, if at all; the record date and payment date for our dividend; and our belief that our existing capital resources and credit facilities will be adequate to fund our operations, including our finance leases and other commitments, for the next 12 months. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date hereof about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors could cause actual results to differ materially from those indicated by the forward-looking statements. Such factors include, among other, economic, social, political, legislative, and regulatory factors; the potential for increased regulation of firearms and firearm-related products; actions of social activists that could have an adverse effect on our business; the impact of lawsuits; the demand for our products; the state of the U.S. economy in general and the firearm industry in particular; general economic conditions and consumer spending patterns, including the impact of inflationary pressures; our competitive environment; the supply, availability, and costs of raw materials and components; speculation surrounding fears of terrorism and crime; our anticipated growth and growth opportunities; our ability to effectively manage and execute the Relocation; our ability to increase demand for our products in various markets, including consumer, law enforcement, and military channels, domestically and internationally; our penetration rates in new and existing markets; our strategies; our ability to maintain and enhance brand recognition and reputation; our ability to introduce new products; the success of new products; our ability to expand our markets; our ability to integrate acquired businesses in a successful manner; the potential for cancellation of orders from our backlog; and other factors detailed from time to time in our reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended April 30, 2022, or the Fiscal 2022 Form 10-K.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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As of: |
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January 31, 2023 |
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April 30, 2022 |
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(In thousands, except par value and share data) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net of allowances for credit losses of $ |
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Inventories |
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Prepaid expenses and other current assets |
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Income tax receivable |
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Total current assets |
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Property, plant, and equipment, net |
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Intangibles, net |
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Goodwill |
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Deferred income taxes |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and deferred revenue |
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Accrued payroll and incentives |
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Accrued income taxes |
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Accrued profit sharing |
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Accrued warranty |
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Total current liabilities |
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Notes and loans payable, net of current portion (Note 4) |
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Finance lease payable, net of current portion |
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Other non-current liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income |
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Treasury stock, at cost ( |
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Total stockholders’ equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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For the Three Months Ended January 31, |
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For the Nine Months Ended January 31, |
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2023 |
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2022 |
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2023 |
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2022 |
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(In thousands, except per share data) |
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Net sales |
$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Operating expenses: |
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Research and development |
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Selling, marketing, and distribution |
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General and administrative |
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Total operating expenses |
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Operating income |
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Other income/(expense), net: |
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Other income/(expense), net |
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Interest expense, net |
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Total other income/(expense), net |
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Income from operations before income taxes |
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Income tax expense |
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Net income |
$ |
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$ |
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$ |
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$ |
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Net income per share: |
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Basic - net income |
$ |
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$ |
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$ |
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$ |
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Diluted - net income |
$ |
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$ |
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$ |
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$ |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
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Accumulated |
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Common |
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Additional |
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Other |
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Total |
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Stock |
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Paid-In |
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Retained |
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Comprehensive |
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Treasury Stock |
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Stockholders’ |
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(In thousands) |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income |
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Shares |
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Amount |
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Equity |
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Balance at October 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Shares issued under employee stock purchase plan |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock under restricted |
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— |
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( |
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— |
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— |
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— |
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— |
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( |
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Repurchase of treasury stock |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Dividends issued |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at January 31, 2022 |
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( |
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Balance at April 30, 2021 |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Shares issued under employee |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock under restricted |
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( |
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— |
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— |
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— |
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— |
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( |
) |
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Repurchase of treasury stock |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Dividends issued |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
) |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at January 31, 2022 |
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( |
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Balance at October 31, 2022 |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock under restricted |
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— |
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( |
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— |
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— |
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— |
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— |
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( |
) |
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Dividends issued |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
) |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at January 31, 2023 |
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Balance at April 30, 2022 |
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|
|
|
|
( |
) |
|
|
|
|||||||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Shares issued under employee |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Issuance of common stock under restricted |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Dividends issued |
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
||||||
Net income |
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Balance at January 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine Months Ended January 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
(Gain)/loss on sale/disposition of assets |
|
|
( |
) |
|
|
|
|
Provision for (recoveries)/losses on notes and accounts receivable |
|
|
( |
) |
|
|
|
|
Impairment of long-lived tangible assets |
|
|
|
|
|
|
||
Stock-based compensation expense |
|
|
|
|
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
|
|
|
|
||
Inventories |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
|
|
Income taxes |
|
|
( |
) |
|
|
( |
) |
Accounts payable |
|
|
|
|
|
( |
) |
|
Accrued payroll and incentives |
|
|
|
|
|
( |
) |
|
Accrued profit sharing |
|
|
( |
) |
|
|
( |
) |
Accrued expenses and deferred revenue |
|
|
( |
) |
|
|
( |
) |
Accrued warranty |
|
|
( |
) |
|
|
( |
) |
Other assets |
|
|
|
|
|
|
||
Other non-current liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash (used in)/provided by operating activities |
|
|
( |
) |
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
||
Payments to acquire patents and software |
|
|
( |
) |
|
|
( |
) |
Proceeds from sale of property and equipment |
|
|
|
|
|
|
||
Payments to acquire property and equipment |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from loans and notes payable |
|
|
|
|
|
|
||
Payments on finance lease obligation |
|
|
( |
) |
|
|
( |
) |
Payments on notes and loans payable |
|
|
( |
) |
|
|
|
|
Payments to acquire treasury stock |
|
|
|
|
|
( |
) |
|
Dividend distribution |
|
|
( |
) |
|
|
( |
) |
Proceeds from exercise of options to acquire common |
|
|
|
|
|
|
||
Payment of employee withholding tax related to |
|
|
( |
) |
|
|
( |
) |
Net cash provided by/(used in) financing activities |
|
|
|
|
|
( |
) |
|
Net decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents, end of period |
|
$ |
|
|
$ |
|
||
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
||
Cash paid for: |
|
|
|
|
|
|
||
Interest |
|
$ |
|
|
$ |
|
||
Income taxes |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
Supplemental Disclosure of Non-cash Investing Activities:
|
|
For the Nine Months Ended January 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Purchases of property and equipment included in accounts payable |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
(1) Organization:
We are one of the world’s leading manufacturers and designers of firearms. We manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles), handcuffs, suppressors, and other firearm-related products for sale to a wide variety of customers, including firearm enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We sell our products under the Smith & Wesson, M&P, and Gemtech brands. We manufacture our products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We store finished good inventory and fulfill customer orders from our distribution center in Columbia, Missouri. We also sell our manufacturing services to other businesses to attempt to level-load our factories. We sell those services under our Smith & Wesson and Smith & Wesson Precision Components brands. We plan to move our headquarters and significant elements of our operations (including our distribution center) to a new facility being constructed in Maryville, Tennessee. See Note 9 — Commitments and Contingencies and Note 10 — Restructuring, for more information regarding this plan.
(2) Basis of Presentation:
Interim Financial Information – The condensed consolidated balance sheet as of January 31, 2023, the condensed consolidated statements of income for the three and nine months ended January 31, 2023 and 2022, the condensed consolidated statements of changes in stockholders’ equity for the three and nine months ended January 31, 2023 and 2022, and the condensed consolidated statements of cash flows for the nine months ended January 31, 2023 and 2022 have been prepared by us without audit. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows for three and nine months ended January 31, 2023 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2022 has been derived from our audited consolidated financial statements.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Fiscal 2022 Form 10-K. The results of operations for the three and nine months ended January 31, 2023 may not be indicative of the results that may be expected for the fiscal year ending April 30, 2023, or any other period.
(3) Leases:
We lease certain of our real estate, machinery, and equipment under non-cancelable operating lease agreements.
We recognize expenses under our operating lease assets and liabilities at the lease commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit interest rate. We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our lease agreements do not require material variable lease payments, residual value guarantees, or restrictive covenants. For operating leases, we recognize expense on a straight-line basis over the lease term. We record tenant improvement allowances as an offsetting adjustment included in our calculation of the respective right-of-use asset.
Certain of our leases include renewal options that enable us to extend the lease term. The execution of those renewal options is at our sole discretion and are reflected in the lease term when they are reasonably certain to be exercised. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
9
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
The amounts of assets and liabilities related to our operating and financing leases as of January 31, 2023 were as follows (in thousands):
|
|
Balance Sheet Caption |
|
January 31, 2023 |
|
|
Operating Leases |
|
|
|
|
|
|
Right-of-use assets |
|
|
|
$ |
|
|
Accumulated amortization |
|
|
|
|
( |
) |
|
Other assets |
|
$ |
|
||
|
|
|
|
|
|
|
|
Accrued expenses and deferred revenue |
|
$ |
|
||
|
Other non-current liabilities |
|
|
|
||
Total operating lease liabilities |
|
|
|
$ |
|
|
Finance Leases |
|
|
|
|
|
|
Right-of-use assets |
|
|
|
$ |
|
|
Accumulated depreciation |
|
|
|
|
( |
) |
|
Property, plant, and equipment, net |
|
$ |
|
||
|
|
|
|
|
|
|
|
Accrued expenses and deferred revenue |
|
$ |
|
||
|
Finance lease payable, net of current portion |
|
|
|
||
Total finance lease liabilities |
|
|
|
$ |
|
|
For the three months ended January 31, 2023, we recorded $
On October 26, 2017, we entered into (a) a lease agreement with Ryan Boone County, LLC, or the Original MO Landlord, concerning certain real property located in Boone County, Missouri on which we have been operating our distribution center, or the MO Lease, and (b) a guaranty in favor of the Original MO Landlord, or the Guaranty. With the completion of the spin-off of our outdoor products and accessories business on August 24, 2020, or the Separation, we entered into a sublease whereby American Outdoor Brands, Inc., our former wholly owned subsidiary, or AOUT, subleases from us
10
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
The following table represents future expected undiscounted cashflows, based on the sublease agreement with AOUT, to be received on an annual basis for the next five years and thereafter, as of January 31, 2023 (in thousands):
Fiscal |
|
Amount |
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total future sublease receipts |
|
|
|
|
Less amounts representing interest |
|
|
( |
) |
Present value of sublease receipts |
|
$ |
|
|
Future lease payments for all our operating and finance leases for succeeding fiscal years is as follows (in thousands):
|
|
|
|
Operating |
|
|
Financing |
|
|
Total |
|
|||
2023 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
2024 |
|
|
|
|
|
|
|
|
|
|
|
|||
2025 |
|
|
|
|
|
|
|
|
|
|
|
|||
2026 |
|
|
|
|
|
|
|
|
|
|
|
|||
2027 |
|
|
|
|
|
|
|
|
|
|
|
|||
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|||
Total future lease payments |
|
|
|
|
|
|
|
|
|
|
|
|||
Less amounts representing interest |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Present value of lease payments |
|
|
|
|
|
|
|
|
|
|
|
|||
Less current maturities of lease liabilities |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Long-term maturities of lease liabilities |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
For the three and nine months ended January 31, 2023, the cash paid for amounts included in the measurement of the liabilities and the operating cash flows was $
(4) Notes, Loans Payable, and Financing Arrangements:
Credit Facilities — On August 24, 2020, we and certain of our subsidiaries entered into an amended and restated credit agreement, or the Amended and Restated Credit Agreement, with certain lenders, including TD Bank, N.A., as administrative agent; TD Securities (USA) LLC and Regions Bank, as joint lead arrangers and joint bookrunners; and Regions Bank, as syndication agent. The Amended and Restated Credit Agreement amended and restated our former credit agreement, dated as of June 15, 2015. The Amended and Restated Credit Agreement is currently unsecured; however, should any Springing Lien Trigger Event (as defined in the Amended and Restated Credit Agreement) occur, we and certain of our subsidiaries would be required to execute certain documents in favor of TD Bank, N.A. and the lenders party to such documents would have a legal, valid, and enforceable first priority lien on the collateral described therein.
The Amended and Restated Credit Agreement provides for a revolving line of credit of $
11
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
As of January 31, 2023, we had $
The Amended and Restated Credit Agreement contains customary limitations, including limitations on indebtedness, liens, fundamental changes to business or organizational structure, investments, loans, advances, guarantees, and acquisitions, asset sales, dividends, stock repurchases, stock redemptions, and the redemption or prepayment of other debt, and transactions with affiliates. We are also subject to financial covenants, including a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio. As of January 31, 2023, we were compliant with all required financial covenants.
Letters of Credit — At January 31, 2023, we had outstanding letters of credit aggregating $
(5) Fair Value Measurement:
We follow the provisions of Accounting Standards Codification, or ASC, 820-10, Fair Value Measurements and Disclosures Topic, or ASC 820-10, for our financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
Financial assets and liabilities recorded on the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access at the measurement date (e.g., active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities).
Our cash and cash equivalents, which are measured at fair value on a recurring basis, totaled $
Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:
Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our judgments about the assumptions a market participant would use in pricing the asset or liability.
We did
12
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
(6) Inventories:
The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or net realizable value, as of January 31, 2023 and April 30, 2022 (in thousands):
|
|
January 31, 2023 |
|
|
April 30, 2022 |
|
||
Finished goods |
|
$ |
|
|
$ |
|
||
Finished parts |
|
|
|
|
|
|
||
Work in process |
|
|
|
|
|
|
||
Raw material |
|
|
|
|
|
|
||
Total inventories |
|
$ |
|
|
$ |
|
||
(7) Accrued Expenses and Deferred Revenue:
The following table sets forth other accrued expenses as of January 31, 2023 and April 30, 2022 (in thousands):
|
|
January 31, 2023 |
|
|
April 30, 2022 |
|
||
Accrued employee benefits |
|
$ |
|
|
$ |
|
||
Accrued taxes other than income |
|
|
|
|
|
|
||
Accrued other |
|
|
|
|
|
|
||
Accrued distributor incentives |
|
|
|
|
|
|
||
Accrued professional fees |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Accrued rebates and promotions |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Total accrued expenses and deferred revenue |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
(8) Stockholders’ Equity:
Earnings per Share
The following table provides a reconciliation of net income and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the three months ended January 31, 2023 and 2022 (in thousands, except per share data):
|
For the Three Months Ended January 31, |
|
|||||||||||||||||||||||||
|
2023 |
|
|
2022 |
|
||||||||||||||||||||||
|
Net |
|
|
|
|
|
Per Share |
|
|
Net |
|
|
|
|
|
Per Share |
|
||||||||||
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
||||||||||
Basic earnings |
$ |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||||
Effect of dilutive stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Diluted earnings |
$ |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||||
The following table provides a reconciliation of net income and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the nine months ended January 31, 2023 and 2022 (in thousands, except per share data):
|
For the Nine Months Ended January 31, |
|
|||||||||||||||||||||||||
|
2023 |
|
|
2022 |
|
||||||||||||||||||||||
|
Net |
|
|
|
|
|
Per Share |
|
|
Net |
|
|
|
|
|
Per Share |
|
||||||||||
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
||||||||||
Basic (loss)/earnings |
$ |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||||
Effect of dilutive stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Diluted (loss)/earnings |
$ |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||||
13
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
For the three months ended January 31, 2023 and 2022, the amount of restricted stock units, or RSUs, excluded from the computation of diluted earnings per share was
Incentive Stock and Employee Stock Purchase Plans
We have two stock plans: the 2013 Incentive Stock Plan and the 2022 Incentive Stock Plan. New grants under the 2013 Incentive Stock Plan have not been made since our stockholders approved the 2022 Incentive Stock Plan at our annual meeting of stockholders held on September 12, 2022. All new grants covering participants are issued under the 2022 Incentive Stock Plan.
The 2022 Incentive Stock Plan authorizes the issuance of
Unless terminated earlier by our Board of Directors, the 2022 Incentive Stock Plan will terminate at the earliest of (1) the tenth anniversary of the effective date of the 2022 Incentive Stock Plan, or (2) such time as no shares of common stock remain available for issuance under the plan and we have no further rights or obligations with respect to outstanding awards under the plan. The date of grant of an award is deemed to be the effective date upon which our Board of Directors or a committee authorizes the granting of such award.
Except in specific circumstances, grants vest over a period of
We have an Employee Stock Purchase Plan, or the ESPP, under which each participant is granted an option to purchase our common stock at a discount on each subsequent exercise date during the offering period (as such terms are defined in the ESPP) in accordance with the terms of the ESPP.
The total stock-based compensation expense, including stock options, purchases under our ESPP, RSUs, and performance-based RSUs, or PSUs, was $
We grant RSUs to employees and non-employee members of our Board of Directors. The awards are made at no cost to the recipient. An RSU represents the right to receive one share of our common stock and does not carry voting or dividend rights. Except in specific circumstances, RSU grants to employees vest over a period of
We grant PSUs to our executive officers and, from time to time, certain management employees who are not executive officers. The PSUs vest, and the fair value of such PSUs will be recognized, over the corresponding
During the nine months ended January 31, 2023, we granted an aggregate of
14
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
with a 2019 grant,
During the nine months ended January 31, 2022, we granted an aggregate of
A summary of activity for unvested RSUs and PSUs for the nine months ended January 31, 2023 and 2022 is as follows:
|
|
For the Nine Months Ended January 31, |
|
|||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
||||
|
|
Total # of |
|
|
Average |
|
|
Total # of |
|
|
Average |
|
||||
|
|
Restricted |
|
|
Grant Date |
|
|
Restricted |
|
|
Grant Date |
|
||||
|
|
Stock Units |
|
|
Fair Value |
|
|
Stock Units |
|
|
Fair Value |
|
||||
RSUs and PSUs outstanding, beginning of period |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Awarded (a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Forfeited |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
RSUs and PSUs outstanding, end of period |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
——————————
As of January 31, 2023, there was $
(9) Commitments and Contingencies:
Litigation
In January 2018, Gemini Technologies, Incorporated, or Gemini, commenced an action against us in the U.S. District Court for the District of Idaho, or the District Court. The complaint alleges, among other things, that we breached the earn-out and other provisions of the asset purchase agreement and ancillary agreements between the parties in connection with our acquisition of the Gemtech business from Gemini. The complaint seeks a declaratory judgment interpreting various terms of the asset purchase agreement and damages in the sum of $
We are a defendant in
15
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
City’s complaint. In July 2019, defendants filed a Petition to Transfer jurisdiction to the Indiana Supreme Court. In November 2019, the Indiana Supreme Court denied defendants' petition to transfer and the case was returned to the trial court. Discovery remains ongoing.
In May 2018, we were named in an action related to the Parkland, Florida shooting that was filed in the Circuit Court, Broward County, Florida seeking a declaratory judgment that a Florida statute that provides firearm manufacturers and dealers immunity from liability when their legally manufactured and lawfully sold firearms are later used in criminal acts applies only to civil actions commenced by governmental agencies, not private litigants. In August 2018, we moved to dismiss the complaint on the grounds that it seeks an impermissible advisory opinion. In December 2018, the court granted defendants’ motion to dismiss without prejudice and granted plaintiffs leave to amend their complaint. Later in December 2018, plaintiffs filed a Second Amended Complaint for Declaratory Relief and defendants filed a Motion to Dismiss Plaintiffs’ Second Amended Complaint. In November 2019, the court granted defendants’ motion to dismiss plaintiffs’ second amended complaint, with prejudice. In June 2021, upon plaintiffs’ motion, the Fourth District Court of Appeal of the State of Florida, or the Court of Appeal, ruled that the Circuit Court’s order dismissing the case was not “final and appealable” and ordered the Circuit Court to enter a final order of dismissal. In July 2021, certain plaintiffs filed a notice of appeal to the Court of Appeal. On January 4, 2023, the Court of Appeal affirmed the trial court's dismissal of the case. On February 6, 2023, plaintiffs filed a notice of appeal to the Supreme Court of Florida.
We are a defendant in a putative class proceeding before the Ontario Superior Court of Justice in Toronto, Canada that was filed in . The action claims CAD$
In May 2020, we were named in an action related to the Chabad of Poway synagogue shooting that took place in April 2019. The complaint was filed in the Superior Court of the State of California, for the County of San Diego – Central, and asserts claims against us for product liability, unfair competition, negligence, and public nuisance. The plaintiffs allege they were present at the synagogue on the day of the incident and suffered physical and/or emotional injury. The plaintiffs seek compensatory and punitive damages, attorneys’ fees, and injunctive relief. In September 2020, we filed a demurrer and motion to strike, seeking to dismiss plaintiffs’ complaint. In July 2021, the court granted our motion in part, and reversed it in part, ruling that (1) the PLCAA barred plaintiffs’ product liability action; (2) plaintiffs did not have standing to maintain an action under the Unfair Competition Law for personal injury related damages, but gave plaintiffs leave to amend to plead an economic injury; and (3) the PLCAA did not bar plaintiffs’ ordinary negligence and public nuisance actions because plaintiffs had alleged that we violated 18 U.S.C. Section 922(b)(4), which generally prohibits the sale of fully automatic “machineguns.” In August 2021, we filed a Petition for Writ of Mandate in the Court of Appeal of the State of California, Fourth Appellate District, Division One. In September 2021, the Court of Appeal denied our appeal. In February 2022, the court consolidated the case with three related cases, in which we are not a party. In March 2022, the court granted our motion, dismissing plaintiffs’ Unfair Competition Law claim, without further leave to amend. Discovery is ongoing.
We are a defendant in an action filed in the U.S. District Court for the District of Massachusetts. In August 2021, the Mexican Government filed an action against several U.S.-based firearms manufacturers and a firearms distributor, claiming defendants design, market, distribute, and sell firearms in ways they know routinely arm the drug cartels in Mexico. Plaintiff alleges, among other claims, negligence, public nuisance, design defect, unjust enrichment and restitution against all defendants and violation of the Massachusetts Consumer Protection Act against us alone, and is seeking monetary damages and injunctive relief. In November 2021, defendants filed motions to dismiss plaintiff's complaint. In January 2022, plaintiff filed its oppositions to our motions. Several amicus briefs were also filed with the court. In April 2022, a hearing was held on defendants’ motions to dismiss. In September 2022, the district court granted defendants’ motions to dismiss. In October 2022, plaintiff filed a notice of appeal with the U.S. Court of Appeals for the First Circuit.
In September 2022, we were named as defendants in 12 nearly identical, separate actions related to a shooting in Highland Park, Illinois on July 4, 2022. The complaints were filed in the Circuit Court of the Nineteenth Judicial Circuit in Lake County, Illinois and
16
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
assert claims against us for negligence and for deceptive and unfair practices under the Illinois Consumer Fraud and Deceptive Business Practices Act. Plaintiffs also name as defendants the website and retailer that sold the firearm, the shooter, and the shooter’s father. The plaintiffs allege they were present at a parade at the time of the incident and suffered physical and/or emotional injury. The plaintiffs seek compensatory damages, attorneys’ fees and injunctive relief. We filed motions for removal of each case to the U.S. District Court for the Northern District of Illinois. In November 2022, we filed a motion to consolidate the cases for preliminary motion purposes. In December 2022, plaintiffs filed motions to remand the cases back to the state court. On January 20, 2023, we filed our opposition to plaintiffs’ motion to remand.
In December 2022, the City of Buffalo, New York filed a complaint in the Supreme Court of the State of New York, County of Erie, against numerous manufacturers, distributors, and retailers of firearms. Later in December 2022, the City of Rochester, New York filed an almost identical complaint in the Supreme Court of the State of New York, County of Monroe, against the same defendants. The complaints allege violation of New York General Business Law, public nuisance, and deceptive business practices in violation of NY General Business Laws. In January 2023, we filed notices of removal of the cases to the US District Court.
We believe that the various allegations as described above are unfounded, and, in addition, that any incident and any results from them or any injuries were due to negligence or misuse of the firearm by the claimant or a third party.
In March 2022,
In addition, from time to time, we are involved in lawsuits, claims, investigations, and proceedings, including commercial, environmental, premises and employment matters, which arise in the ordinary course of business.
The relief sought in individual cases primarily includes compensatory and, sometimes, punitive damages. Certain of the cases and claims seek unspecified compensatory or punitive damages. In others, compensatory damages sought may range from less than $
We are vigorously defending ourselves in the lawsuits to which we are subject. An unfavorable outcome or prolonged litigation could harm our business. Litigation of this nature also is expensive, time consuming, and diverts the time and attention of our management.
We monitor the status of known claims and the related product liability accrual, which includes amounts for defense costs for asserted and unasserted claims. After consultation with litigation counsel and a review of the merit of each claim, we have concluded that we are unable to reasonably estimate the probability or the estimated range of reasonably possible losses related to material adverse judgments related to such claims and, therefore, we have not accrued for any such judgments. In the future, should we determine that a loss (or an additional loss in excess of our accrual) is at least reasonably possible and material, we would then disclose an estimate of the possible loss or range of loss, if such estimate could be made, or disclose that an estimate could not be made. We believe that we have provided adequate accruals for defense costs.
We recorded our liability for defense costs before consideration for reimbursement from insurance carriers. We have also recorded the amount due as reimbursement under existing policies from the insurance carriers as a receivable shown in other current assets and other assets.
At this time, an estimated range of reasonably possible additional losses relating to unfavorable outcomes cannot be made.
Commitments
On September 30, 2021, we announced our plan to move our headquarters and significant elements of our operations to Maryville, Tennessee in 2023, or the Relocation. In connection with the Relocation, we entered into a project agreement, or the Project Agreement, with The Industrial Development Board of Blount County and the cities of Alcoa and Maryville, Tennessee, a public, nonprofit corporation organized and existing under the laws of the state of Tennessee, or the IDB.
17
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
On February 2, 2023, we entered into a design-build agreement with The Christman Company, or Christman, related to the construction of our new distribution center and corporate office headquarters in Maryville, Tennessee, or the Construction Contract. The Construction Contract has an effective date of September 13, 2021 and incorporates the arrangements under which we and Christman have been proceeding. Pursuant to the Construction Contract, Christman is obligated to deliver certain services, including, among others, design phase services and construction phase services, and we are obligated to pay Christman for services performed. The parties to the Construction Contract have jointly agreed that Christman will perform and complete the Work (as defined therein) on a cost plus basis for a guaranteed maximum price of $
As part of the Relocation, on January 31, 2023, we entered into the Assignment and Assumption Agreement and the Amended and Restated Guaranty. Assets associated with certain of our assembly operations in Massachusetts and distribution operations in Missouri continue to be fully utilized, and we intend to either move those assets to Tennessee at the appropriate time or sell or sublease those assets that will not be moved. Consequently, as of January 31, 2023, we do not believe we have an impairment related to the building or assets. Subsequent to the Relocation, we expect our Massachusetts facility will continue to remain an important part of our manufacturing activities with significant portions of the operations being unaffected by the Relocation.
In addition, at or near the conclusion of our Connecticut building lease in May 2024, we intend to relocate a portion of our plastic injection molding operations to Tennessee and will evaluate selling the remaining molding operations utilized in our Connecticut operations to a third party. As of January 31, 2023, all plastic injection molding machinery and equipment was being utilized. Therefore, we could not determine an estimated range of reasonably possible losses associated with any impairment of such assets because we have not yet determined which assets may be sold.
18
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2023 and 2022
(10) Restructuring:
As a result of the Relocation, $
The following table summarizes restructuring charges by line item for the three and nine months ended January 31, 2023 and 2022 (in thousands):
|
|
For the Three Months Ended January 31, |
|
|
For the Nine Months Ended January 31, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Cost of sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, marketing, and distribution |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total restructuring charges |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The components of the restructuring charges recorded in our consolidated income statement are as follows (in thousands):
|
|
For the Three Months Ended January 31, |
|
|
For the Nine Months Ended January 31, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Severance and employee-related benefits (a) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Relocation (a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Consulting services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Employee relations |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Office rent and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total restructuring charges |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
___________________________________________
(a) Accrued under payroll and incentive
The following table summarizes the activity in the severance and employee-related benefits and relocation accruals for the nine months ended January 31, 2023 (in thousands):
|
|
Severance and employee-related benefits |
|
|
Relocation |
|
|
Total |
|
|||
Accrual at April 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Charges |
|
|
|
|
|
|
|
|
|
|||
Cash payments and settlements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Accrual at January 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Please refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2022 Annual Report and our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. This section sets forth key objectives and performance indicators used by us as well as key industry data tracked by us.
Third Quarter Fiscal 2023 Highlights
Our operating results for the three months ended January 31, 2023 included the following:
Our operating results for the nine months ended January 31, 2023 included the following:
Results of Operations
Net Sales and Gross Profit – For the Three Months Ended January 31, 2023
The following table sets forth certain information regarding net sales and gross profit for the three months ended January 31, 2023 and 2022 (dollars in thousands):
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Handguns |
$ |
101,952 |
|
|
$ |
132,921 |
|
|
$ |
(30,969 |
) |
|
|
-23.3 |
% |
Long Guns |
|
15,312 |
|
|
|
29,459 |
|
|
|
(14,147 |
) |
|
|
-48.0 |
% |
Other Products & Services |
|
11,772 |
|
|
|
15,358 |
|
|
|
(3,586 |
) |
|
|
-23.3 |
% |
Total net sales |
$ |
129,036 |
|
|
$ |
177,738 |
|
|
$ |
(48,702 |
) |
|
|
-27.4 |
% |
Cost of sales |
|
87,195 |
|
|
|
107,339 |
|
|
|
(20,144 |
) |
|
|
-18.8 |
% |
Gross profit |
$ |
41,841 |
|
|
$ |
70,399 |
|
|
$ |
(28,558 |
) |
|
|
-40.6 |
% |
% of net sales (gross margin) |
|
32.4 |
% |
|
|
39.6 |
% |
|
|
|
|
|
|
||
The following table sets forth certain information regarding firearm units shipped by trade channel for the three months ended January 31, 2023 and 2022 (units in thousands):
Total Units Shipped |
|
2023 |
|
|
2022 |
|
|
# Change |
|
|
% Change |
|||
Handguns |
|
|
223 |
|
|
|
316 |
|
|
|
(93 |
) |
|
-29.4% |
Long Guns |
|
|
32 |
|
|
|
55 |
|
|
|
(23 |
) |
|
-41.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Sporting Goods Channel Units Shipped |
|
2023 |
|
|
2022 |
|
|
# Change |
|
|
% Change |
|||
Handguns |
|
|
207 |
|
|
|
299 |
|
|
|
(92 |
) |
|
-30.8% |
Long Guns |
|
|
30 |
|
|
|
50 |
|
|
|
(20 |
) |
|
-40.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Professional Channel Units Shipped |
|
2023 |
|
|
2022 |
|
|
# Change |
|
|
% Change |
|||
Handguns |
|
|
16 |
|
|
|
17 |
|
|
|
(1 |
) |
|
-5.9% |
Long Guns |
|
|
2 |
|
|
|
5 |
|
|
|
(3 |
) |
|
-60.0% |
Sales of our handguns decreased $31.0 million, or 23.3%, from the comparable quarter last year. Handgun unit shipments into the sporting goods channel decreased by 30.8% from the comparable quarter last year while overall consumer handgun demand increased 1.4% (as indicated by adjusted background checks reported in the National Instant Criminal Background Check System, or adjusted
20
NICS). The decrease in revenue was primarily due to decreased shipments of our M&P branded polymer pistols, partially offset by increased shipments of revolvers, and increased shipments of newly introduced products, defined as any new SKU not shipped in the comparable quarter last year, which represented 17.0% of sales in the period, as well as two price increases, one of which was across all products and one that was more limited. We believe the decrease in our handgun shipments relative to adjusted NICS was a result of easing consumer demand as competing products became more available subsequent to the pandemic, combined with a trading down in price by consumers due to heightened inflation. In addition, during our third quarter, inventory in our distribution channel declined by an additional 7.6% from our second quarter, or nearly 32.0% lower than the prior year comparable quarter, indicating that our channel partners continue to adjust inventory levels.
Sales of our long guns decreased $14.1 million, or 48.0%, from the comparable quarter last year. Long gun unit shipments into our sporting goods channel decreased 40.0% from the comparable quarter last year while overall consumer demand for long guns decreased 2.7%, as indicated by adjusted NICS. Similar to handgun sales, increased competitor activity combined with a decline of our inventory in our distribution channel by an additional 16.6% from our second quarter, or nearly 58% lower than the prior year comparable quarter, resulted in our sales of long guns in the quarter underperforming adjusted NICS results.
Other products and services revenue decreased $3.6 million, or 23.3%, from the comparable quarter last year, primarily because of decreased sales of handcuffs, component parts, and business-to-business services, as well as decreased licensing revenue.
New products represented 20.9% of sales for the three months ended January 31, 2023 and included five new pistols and many new product line extensions.
Gross margin for the three months ended January 31, 2023 was 32.4% compared with gross margin of 39.6% for the comparable quarter last year, primarily because of a combination of reduced sales volumes across nearly all product lines, the impact of inflation on raw material and finished parts, which increased approximately 6.0% over the prior year, the impact of inflation on labor costs, particularly as it relates to entry level positions, and unfavorable fixed-cost absorption due to lower production volume, partially offset by decreased compensation costs and favorable inventory valuation adjustments. We generally attempt to mitigate inflationary impacts with price increases, when and where possible, based on market dynamics; however, our ability to increase prices in recent periods has been constrained by the competitiveness of the market following the most recent surge in demand. In addition, we generally utilize process improvements to mitigate inflationary impacts; however, our ability to utilize process improvements in recent periods has been constrained by factors related to the Relocation and our ability to utilize process improvements in future periods will likely resume only once the Relocation is completed.
Our inventory balances increased $56.8 million between April 30, 2022 and January 31, 2023 as we replenished stock to provide our customers with a more robust selection of inventory and positioned ourselves for potential increases in consumer demand. During the third quarter of fiscal 2023, our inventory balances decreased $3.0 million. While inventory levels, both internally and in the distribution channel, in excess of demand may negatively impact future operating results, it is difficult to forecast the potential impact of distributor inventories on future revenue and income as demand is impacted by many factors, including seasonality, new product introductions, news events, political events, and consumer tastes. We expect our inventory levels will decline by the end of the fiscal year because of normal seasonality, but will remain elevated as we begin our transition to our new facility in Tennessee.
Net Sales and Gross Profit – For the Nine Months Ended January 31, 2023
The following table sets forth certain information regarding net sales and gross profit for the nine months ended January 31, 2023 and 2022 (dollars in thousands):
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Handguns |
|
$ |
254,356 |
|
|
$ |
488,303 |
|
|
$ |
(233,947 |
) |
|
|
-47.9 |
% |
Long Guns |
|
|
46,416 |
|
|
|
157,470 |
|
|
|
(111,054 |
) |
|
|
-70.5 |
% |
Other Products & Services |
|
|
33,693 |
|
|
|
37,053 |
|
|
|
(3,360 |
) |
|
|
-9.1 |
% |
Total net sales |
|
$ |
334,465 |
|
|
$ |
682,826 |
|
|
$ |
(348,361 |
) |
|
|
-51.0 |
% |
Cost of sales |
|
|
221,890 |
|
|
|
380,490 |
|
|
|
(158,600 |
) |
|
|
-41.7 |
% |
Gross profit |
|
$ |
112,575 |
|
|
$ |
302,336 |
|
|
$ |
(189,761 |
) |
|
|
-62.8 |
% |
% of net sales (gross margin) |
|
|
33.7 |
% |
|
|
44.3 |
% |
|
|
|
|
|
|
||
21
The following table sets forth certain information regarding firearm units shipped by trade channel for the nine months ended January 31, 2023 and 2022 (units in thousands):
Total Units Shipped |
|
2023 |
|
|
2022 |
|
|
# Change |
|
|
% Change |
|||
Handguns |
|
|
560 |
|
|
|
1,205 |
|
|
|
(645 |
) |
|
-53.5% |
Long Guns |
|
|
90 |
|
|
|
301 |
|
|
|
(211 |
) |
|
-70.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Sporting Goods Channel Units Shipped |
|
2023 |
|
|
2022 |
|
|
# Change |
|
|
% Change |
|||
Handguns |
|
|
514 |
|
|
|
1,132 |
|
|
|
(618 |
) |
|
-54.6% |
Long Guns |
|
|
82 |
|
|
|
285 |
|
|
|
(203 |
) |
|
-71.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Professional Channel Units Shipped |
|
2023 |
|
|
2022 |
|
|
# Change |
|
|
% Change |
|||
Handguns |
|
|
46 |
|
|
|
73 |
|
|
|
(27 |
) |
|
-37.0% |
Long Guns |
|
|
8 |
|
|
|
16 |
|
|
|
(8 |
) |
|
-50.0% |
Sales of our handguns decreased $233.9 million, or 47.9%, from the prior year comparable period. The decrease in sales was primarily as a result of a return to more normalized demand from the historic pandemic-related demand that lasted from March 2020 through the beginning of fiscal 2022 as competing products became more available through the replenishment of depleted channel inventory, partially offset by net sales generated from increased shipments of new products, which represented 18.6% of sales in the period, and two price increases. Handgun unit shipments into the sporting goods channel decreased by 54.6% from the comparable quarter last year while overall consumer handgun demand decreased 3.4%, as indicated by adjusted NICS. In addition, during the first three quarters of fiscal 2023, inventory in our distribution channel declined by more than 29%, which negatively impacted our net sales for fiscal 2023.
Sales of our long guns decreased $111.1 million, or 70.5%, from the prior year comparable period. Similar to handgun sales, this decrease was primarily as a result of lower demand for the majority of our long gun products as competing products became more available through the replenishment of depleted channel inventory. Long gun unit shipments into our sporting goods channel decreased 71.2% from the comparable quarter last year while overall consumer demand for long guns decreased 6.4%, as indicated by adjusted NICS. In addition, during the first three quarters of fiscal 2023, inventory in our distribution channel declined by 43%, which negatively impacted our net sales for fiscal 2023.
We believe that overall firearm demand remains healthy, as indicated by adjusted NICS data, but has normalized from the surge levels we experienced during much of calendar 2020 and 2021. We believe our comparable shipments year over year underperformed in comparison to adjusted NICS primarily because of an over-replenishment of our channel inventory during the first three quarters of fiscal 2022, at which time channel inventory peaked, and which led to our distribution partners actively seeking to reduce inventory during fiscal 2023.
Other products and services revenue decreased $3.4 million, or 9.1%, from the prior year comparable period, primarily because of decreased sales of component parts, business-to-business services, and decreased licensing revenue, partially offset by increased sales of handcuffs.
New products represented 22.5% of sales for the nine months ended January 31, 2023 and included five new pistols and many new product line extensions.
Gross margin for the nine months ended January 31, 2023 was 33.7% compared with gross margin of 44.3% for the comparable period last year, primarily because of a combination of reduced sales volumes across nearly all product lines, the impact of inflation on raw material and finished parts, which increased approximately 6.3% over the prior year, the impact of inflation on labor costs, particularly as it relates to entry level positions, and unfavorable fixed-cost absorption due to lower production volume, and expenses related to employee severance, partially offset by decreased compensation costs and favorable inventory valuation adjustments. As noted above, we generally attempt to mitigate inflationary impacts with price increases, when and where possible, based on market dynamics, and process improvements, although our ability to utilize process improvements in recent periods has been constrained by factors related to the Relocation.
22
Operating Expenses
The following table sets forth certain information regarding operating expenses for the three months ended January 31, 2023 and 2022 (dollars in thousands):
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Research and development |
$ |
2,133 |
|
|
$ |
1,716 |
|
|
$ |
417 |
|
|
|
24.3 |
% |
Selling, marketing, and distribution |
|
9,996 |
|
|
|
11,518 |
|
|
|
(1,522 |
) |
|
|
-13.2 |
% |
General and administrative |
|
15,576 |
|
|
|
17,443 |
|
|
|
(1,867 |
) |
|
|
-10.7 |
% |
Total operating expenses |
$ |
27,705 |
|
|
$ |
30,677 |
|
|
$ |
(2,972 |
) |
|
|
-9.7 |
% |
% of net sales |
|
21.5 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
||
Research and development expenses increased $417,000 over the prior year comparable quarter, primarily because of new product development costs, partially offset by decreased compensation-related costs, driven by temporarily unfilled positions, which we believe were as a result of the Relocation. Selling, marketing, and distribution expenses decreased $1.5 million, primarily as a result of decreased compensation-related expenses resulting from lower profit-related compensation costs and temporarily unfilled positions, decreased advertising costs, decreased co-op advertising expenses on lower sales, and decreased costs associated with the Relocation, partially offset by increased spending on targeted customer promotions and increased expenses relating to industry shows. General and administrative expenses decreased $1.9 million, primarily because of decreased profit sharing expense, decreased compensation-related costs, driven by temporarily unfilled positions, which we believe were as a result of the Relocation, lower profit-related compensation costs, and lower costs associated with the Relocation.
The following table sets forth certain information regarding operating expenses for the nine months ended January 31, 2023 and 2022 (dollars in thousands):
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Research and development |
|
$ |
5,675 |
|
|
$ |
5,269 |
|
|
$ |
406 |
|
|
|
7.7 |
% |
Selling, marketing, and distribution |
|
|
27,454 |
|
|
|
33,575 |
|
|
|
(6,121 |
) |
|
|
-18.2 |
% |
General and administrative |
|
|
48,867 |
|
|
|
58,491 |
|
|
|
(9,624 |
) |
|
|
-16.5 |
% |
Total operating expenses |
|
$ |
81,996 |
|
|
$ |
97,335 |
|
|
$ |
(15,339 |
) |
|
|
-15.8 |
% |
% of net sales |
|
|
24.5 |
% |
|
|
14.3 |
% |
|
|
|
|
|
|
||
Research and development expenses increased $406,000 over the prior year comparable period, primarily because of increased new product development costs, partially offset by decreased compensation-related costs. Selling, marketing, and distribution expenses decreased $6.1 million, primarily as a result of decreased compensation-related expenses, decreased co-op advertising expenses, decreased advertising costs, and decreased freight costs due to lower shipments, partially offset by increased spending on targeted customer promotions, and increased expenses related to industry shows. General and administrative expenses decreased $9.6 million, primarily because of decreased profit-related compensation costs, lower costs associated with the Relocation, decreased profit sharing expense, decreased legal-related expenses, and decreased bad debt expense.
Operating Income
The following table sets forth certain information regarding operating income for the three months ended January 31, 2023 and 2022 (dollars in thousands):
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Operating income from operations |
$ |
14,136 |
|
|
$ |
39,722 |
|
|
$ |
(25,586 |
) |
|
|
-64.4 |
% |
% of net sales (operating margin) |
|
11.0 |
% |
|
|
22.3 |
% |
|
|
|
|
|
|
||
Operating income for the three months ended January 31, 2023 decreased $25.6 million from the comparable quarter last year, primarily because of reduced sales volumes across nearly all product lines, unfavorable fixed-cost absorption, increased product development costs, increased costs on targeted customer promotions, and increased expenses related to industry shows, partially offset by decreased co-op advertising expenses, decreased profit-related compensation expenses, decreased profit sharing expense, decreased digital advertising costs, decreased costs associated with the Relocation, and favorable inventory valuation adjustments.
The following table sets forth certain information regarding operating income for the nine months ended January 31, 2023 and 2022 (dollars in thousands):
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Operating income from operations |
|
$ |
30,579 |
|
|
$ |
205,001 |
|
|
$ |
(174,422 |
) |
|
|
-85.1 |
% |
% of net sales (operating margin) |
|
|
9.1 |
% |
|
|
30.0 |
% |
|
|
|
|
|
|
||
23
Operating income for the nine months ended January 31, 2023 decreased $174.4 million from the prior year comparable period, primarily because of reduced sales volumes across nearly all product lines, unfavorable fixed-cost absorption, increased product development costs, increased spending on targeted customer promotions, partially offset by decreased co-op advertising expenses, decreased compensation-related expenses, decreased digital advertising costs, decreased freight costs due to lower shipments, decreased profit sharing expense, decreased legal-related expenses, decreased costs associated with the Relocation, and favorable inventory valuation adjustments.
Income Taxes
The following table sets forth certain information regarding income tax expense for the three months ended January 31, 2023 and 2022 (dollars in thousands):
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Income tax expense |
$ |
3,389 |
|
|
$ |
9,337 |
|
|
$ |
(5,948 |
) |
|
|
-63.7 |
% |
% of income from operations (effective tax rate) |
|
23.4 |
% |
|
|
23.4 |
% |
|
|
|
|
|
0.0 |
% |
|
Income tax expense decreased $5.9 million from the comparable quarter last year as a result of lower operating income.
The following table sets forth certain information regarding income tax expense for the nine months ended January 31, 2023 and 2022 (dollars in thousands):
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Income tax expense |
|
$ |
7,483 |
|
|
$ |
47,281 |
|
|
$ |
(39,798 |
) |
|
|
-84.2 |
% |
% of income from operations (effective tax rate) |
|
|
23.7 |
% |
|
|
23.0 |
% |
|
|
|
|
|
0.7 |
% |
|
Income tax expense decreased $39.8 million from the prior year comparable period as a result of lower operating income.
Net Income
The following table sets forth certain information regarding net income and the related per share data for the three months ended January 31, 2023 and 2022 (dollars in thousands, except per share data):
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Income from operations |
$ |
11,079 |
|
|
$ |
30,542 |
|
|
$ |
(19,463 |
) |
|
|
-63.7 |
% |
Net income per share |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
$ |
0.24 |
|
|
$ |
0.65 |
|
|
$ |
(0.41 |
) |
|
|
-63.1 |
% |
Diluted |
$ |
0.24 |
|
|
$ |
0.65 |
|
|
$ |
(0.41 |
) |
|
|
-63.1 |
% |
Net income for the three months ended January 31, 2023 was $11.1 million compared with $30.5 million for the comparable quarter last year for the reasons outlined above.
The following table sets forth certain information regarding net income and the related per share data for the nine months ended January 31, 2023 and 2022 (dollars in thousands, except per share data):
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Income from operations |
|
$ |
24,039 |
|
|
$ |
158,359 |
|
|
$ |
(134,320 |
) |
|
|
-84.8 |
% |
Net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.52 |
|
|
$ |
3.32 |
|
|
$ |
(2.80 |
) |
|
|
-84.3 |
% |
Diluted |
|
$ |
0.52 |
|
|
$ |
3.28 |
|
|
$ |
(2.76 |
) |
|
|
-84.1 |
% |
Net income for the nine months ended January 31, 2023 was $24.0 million compared with $158.4 million for the prior year comparable period for the reasons outlined above.
Liquidity and Capital Resources
Our principal cash requirements are to (1) finance the growth of our operations, including working capital and capital expenditures, (2) fund the Relocation, and (3) return capital to stockholders. Capital expenditures for the Relocation, new product development, and repair and replacement of equipment represent important cash needs.
24
The following table sets forth certain cash flow information for the nine months ended January 31, 2023 and 2022 (dollars in thousands):
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Operating activities |
|
$ |
(21,248 |
) |
|
$ |
112,275 |
|
|
$ |
(133,522 |
) |
|
|
-118.9 |
% |
Investing activities |
|
|
(64,752 |
) |
|
|
(15,211 |
) |
|
|
(49,541 |
) |
|
|
-325.7 |
% |
Financing activities |
|
|
9,868 |
|
|
|
(102,813 |
) |
|
|
112,681 |
|
|
|
109.6 |
% |
Total cash flow |
|
$ |
(76,132 |
) |
|
$ |
(5,749 |
) |
|
$ |
(70,383 |
) |
|
|
1224.3 |
% |
Operating Activities
On an annual basis, operating activities generally represent the principal source of our cash flows. Cash used in operating activities was $21.2 million for the nine months ended January 31, 2023 compared with $112.3 million of cash generated for the nine months ended January 31, 2022. In addition to a $134.3 million reduction in net income, cash used in operating activities for the nine months ended January 31, 2023 was negatively impacted by an incremental $12.9 million smaller decrease in accounts receivable, partially offset by an incremental $21.3 million increase in accounts payable.
Investing Activities
Cash used in investing activities increased $49.5 million for the nine months ended January 31, 2023 compared with the prior year comparable period. We paid $64.6 million for capital expenditures for the nine months ended January 31, 2023, $49.5 million higher than the prior year comparable period primarily due to payments related to the Relocation. Excluding payments related to the Relocation, we expect to spend between $20.0 million and $25.0 million on capital expenditures in fiscal 2023, representing a decrease of $4.0 million to an increase of nearly $1.0 million, as compared with $24.0 million in capital expenditures in fiscal 2022. This is primarily due to lower expenditures related to capacity offset by expenditures related to new product development and repair and replacement of equipment.
Additionally, as it relates to the Relocation, we expect to incur capital expenditures in connection with the construction and equipping of the new facility in an aggregate amount of approximately $160.0 million to $170.0 million through the end of fiscal 2024. We expect to spend between $95.0 million and $100.0 million on capital expenditures in fiscal 2023, of which $65.0 million to $70.0 million is expected for the construction of the facility. This spending will be recorded in construction in progress throughout the building construction. Through the nine months ended January 31, 2023, we have incurred $59.3 million and paid $52.8 million for capital expenditures in connection with the Relocation, which was net of $9.0 million in state and local incentives received during the period.
Financing Activities
Cash provided by financing activities was $9.9 million for the nine months ended January 31, 2023 compared with $102.8 million used in financing activities for the nine months ended January 31, 2022. Cash provided by financing activities during the nine months ended January 31, 2023 was primarily a result of $25.0 million of borrowings under our Revolving Line, partially offset by $13.7 million in dividend distributions. For the nine months ended January 31, 2022, cash used in financing activities was primarily the result of a $90.0 million treasury stock repurchase and $11.4 million in dividend distributions.
Finance Lease – We are a party to a $46.2 million lease for our Missouri distribution center, which has an effective interest rate of approximately 5.0% and is payable in 240 monthly installments through fiscal 2039. The building is pledged to secure the amounts outstanding. During the nine months ending January 31, 2023, we paid approximately $559,000 in principal payments relating to this finance lease. With the completion of the Separation, we entered into the Sublease. On July 16, 2022, we entered into an amendment to the Sublease, increasing the subleased space to 64.7% of the facility under the same terms as the MO Lease. On January 31, 2023, we entered into the Assignment and Assumption Agreement and the Amended and Restated Guaranty. We intend to terminate the Sublease on or around the effective date of the Assignment and Assumption Agreement. For the nine months ended January 31, 2023, we recorded $1.7 million of income related to the Sublease, which is recorded in other income/(expense) in our condensed consolidated statements of income.
Credit Facilities — As of January 31, 2023, we had $25.0 million of borrowings outstanding on the Revolving Line. We maintain the Revolving Line, which includes availability up to $100.0 million at any one time. The Revolving Line provides for availability for general corporate purposes, with borrowings to bear interest at either the Base Rate or LIBOR rate, plus an applicable margin based on our consolidated leverage ratio, as of January 31, 2023. The Amended and Restated Credit Agreement also provides a swingline facility in the maximum amount of $5.0 million at any one time (subject to availability under the Revolving Line). Each Swingline Loan (as defined in the Amended and Restated Credit Agreement) bears interest at the Base Rate, plus an applicable margin based on our consolidated leverage ratio. In the event of a Springing Lien Triggering Event (as defined in the Amended and Restated Credit
25
Agreement), we would be required to enter into certain documents that create in favor of the administrative agent, and the lenders party to such documents as legal, valid, and enforceable first priority lien on the collateral described therein. Subject to the satisfaction of certain terms and conditions described in the Amended and Restated Credit Agreement, we have an option to increase the Revolving Line by an aggregate amount not exceeding $50.0 million. The Revolving Line matures on the earlier of August 24, 2025, or the date that is six months in advance of the earliest maturity of any Permitted Notes under the Amended and Restated Credit Agreement. We are currently negotiating with our lenders to transition from LIBOR to SOFR, which may affect our future borrowing rates.
The Amended and Restated Credit Agreement contains financial covenants relating to maintaining maximum leverage and minimum debt service coverage. We were in compliance with all debt covenants as of January 31, 2023.
Dividends — In March 2022, our Board of Directors authorized a regular quarterly dividend for stockholders of $0.10 per share. The current dividend will be for stockholders of record as of market close on March 16, 2023 and will be payable on March 30, 2023.
Our future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, and costs related to the Relocation. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.
As of January 31, 2023, we had $44.6 million in cash and cash equivalents on hand. Based upon our current working capital position, current operating plans, and expected business conditions, we believe that our existing capital resources and credit facilities will be adequate to fund our operations, including our finance leases and other commitments, for the next 12 months.
Other Matters
Critical Accounting Policies
The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant accounting policies are disclosed in Note 2 of the Notes to the Consolidated Financial Statements in our Fiscal 2022 Annual Report. The most significant areas involving our judgments and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2022 Annual Report, to which there have been no material changes. Actual results could differ from our estimates.
Recent Accounting Pronouncements
The nature and impact of recent accounting pronouncements, if any, is discussed in Note 2—Basis of Presentation to our condensed consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the period ended January 31, 2023, we did not enter into or transact any forward option contracts nor did we have any forward contracts outstanding.
26
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of January 31, 2023, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act was recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
27
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The nature of legal proceedings against us is discussed in Note 9—Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As of January 31, 2023, we had no authorized share repurchase programs.
Item 6. Exhibits
The exhibits listed on the Index to Exhibits (immediately preceding the signatures section of this Quarterly Report on Form 10-Q) are included herewith or incorporated herein by reference.
28
INDEX TO EXHIBITS
3.1 |
|
|
|
|
|
10.134 |
|
|
|
|
|
10.135 |
|
|
|
|
|
10.136* |
|
|
|
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer |
|
|
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer |
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
|
* Certain schedules and exhibits have been omitted from this filing pursuant to Instruction 4 to Item 1.01 of Form 8-K. We agree to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
SMITH & WESSON BRANDS, INC. a Nevada corporation |
||
|
|
|
||
Date: March 9, 2023 |
|
By: |
|
/s/ Mark P. Smith |
|
|
|
|
Mark P. Smith |
|
|
|
|
President and Chief Executive Officer |
Date: March 9, 2023 |
|
By: |
|
/s/ Deana L. McPherson |
|
|
|
|
Deana L. McPherson |
|
|
|
|
Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary |
30
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark P. Smith, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Smith & Wesson Brands, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By: |
|
/s/ Mark P. Smith |
|
|
Mark P. Smith |
|
|
President and Chief Executive Officer |
Date: March 9, 2023
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Deana L. McPherson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Smith & Wesson Brands, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By: |
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/s/ Deana L. McPherson |
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Deana L. McPherson |
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Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary |
Date: March 9, 2023
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Smith & Wesson Brands, Inc. (the “Company”) for the quarterly period ended January 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark P. Smith, President and Chief Executive Officer of the Company, certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: |
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/s/ Mark P. Smith |
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Mark P. Smith |
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President and Chief Executive Officer |
Date: March 9, 2023
This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission, and is not to be incorporated by reference into any filing of Smith & Wesson Brands, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Smith & Wesson Brands, Inc. (the “Company”) for the quarterly period ended January 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Deana L. McPherson, Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary of the Company, certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: |
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/s/ Deana L. McPherson |
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Deana L. McPherson |
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Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary |
Date: March 9, 2023
This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission, and is not to be incorporated by reference into any filing of Smith & Wesson Brands, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.