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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

 

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

For the quarterly period ended July 31, 2023

Commission File No. 001-31552

 

https://cdn.kscope.io/d2388a6494d90796e4ff6d96dc2fca69-img125871622_0.jpg 

 

Smith & Wesson Brands, Inc.

(Exact name of registrant as specified in its charter)

Nevada

87-0543688

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2100 Roosevelt Avenue

Springfield, Massachusetts

01104

(Address of principal executive offices)

(Zip Code)

(800) 331-0852

(Registrant’s telephone number, including area code)

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

 

Title of each Class

Trading Symbol

Name of exchange on which registered

Common Stock, par value $0.001 per share

SWBI

Nasdaq Global Select Market

 

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

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

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

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

 

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

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

The registrant had 46,148,451 shares of common stock, par value $0.001, outstanding as of September 5, 2023.

 


 

SMITH & WESSON BRANDS, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended July 31, 2023 and 2022

 

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

 

 

Item 1. Financial Statements (Unaudited)

4

 

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

19

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

23

 

Item 4. Controls and Procedures

23

 

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1. Legal Proceedings

24

 

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

 

24

 

Item 6. Exhibits

24

Signatures

26

EX-31.1

 

EX-31.2

 

EX-32.1

 

 

EX-32.2

 

 

 

Smith & Wesson®, S&W®, M&P®, M&P Shield®, Performance Center®, Airlite®, Airweight®, 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®, Encore®, E-Series®, EZ®, Flextech®, G-Core®, Gemtech®, Gemtech Suppressors®, Gemtech World-Class Silencers®, GM®, GMT-Halo®, Governor®, Integra®, Lady Smith®, Lever Lock®, Lunar®, M&P FPC®, 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 Accurizor®, Quickmount®, Shield®, Smith & Wesson Collectors Association®, Smith & Wesson Performance Center®, Smith & Wesson Precision Components®, Speed Breech®, Speed Breach XT®, SW Equalizer®, SW22 Victory®, Swing Hammer®, T/C®, T/CR22®, T17®, The S&W Bench®, The Sigma Series®, Thompson/Center®, Trek®, Triumph®, U-View®, Viper®, Volunteer®, and Weather Shield® are some of the registered U.S. 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 certain 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); our intention to occupy our Connecticut facility through the lease term; 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 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 intention, with respect to assets associated with our assembly operations in Massachusetts and distribution operations in Missouri, to either move those assets to the Maryville facility 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 to relocate a portion of the plastic injection molding operations to Tennessee, which is expected to begin in our second quarter of 2023, 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 expectation that our inventory levels will decline by the end of the fiscal year due to the completion of a significant portion of the operational transition to the new Maryville facility combined with alignment of production capacity to channel inventory and consumer demand; our expectation for capital expenditures in fiscal 2024, 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 others, economic, political, social, legislative, regulatory, inflationary, and health factors; the potential for increased regulation of firearms and firearm-related products; actions of social activists that could have an adverse effect on our business; the impact of lawsuits; the demand for our products; the state of the U.S. economy in general and the firearm industry in particular; general economic conditions and consumer spending patterns; our competitive environment; the supply, availability, and costs of raw materials and components; speculation surrounding fears of terrorism and crime; our anticipated growth and growth opportunities; our ability to 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; 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, 2023, or the Fiscal 2023 Form 10-K.

 


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

As of:

 

 

 

July 31, 2023

 

 

April 30, 2023

 

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

55,479

 

 

$

53,556

 

Accounts receivable, net of allowances for credit losses of $17 on
   July 31, 2023 and $
23 on April 30, 2023

 

 

28,164

 

 

 

55,153

 

Inventories

 

 

170,754

 

 

 

177,118

 

Prepaid expenses and other current assets

 

 

8,741

 

 

 

4,917

 

Income tax receivable

 

 

1,015

 

 

 

1,176

 

Total current assets

 

 

264,153

 

 

 

291,920

 

Property, plant, and equipment, net

 

 

234,595

 

 

 

210,330

 

Intangibles, net

 

 

3,534

 

 

 

3,588

 

Goodwill

 

 

19,024

 

 

 

19,024

 

Deferred income taxes

 

 

8,085

 

 

 

8,085

 

Other assets

 

 

8,271

 

 

 

8,347

 

Total assets

 

$

537,662

 

 

$

541,294

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

36,335

 

 

$

36,795

 

Accrued expenses and deferred revenue

 

 

16,041

 

 

 

20,149

 

Accrued payroll and incentives

 

 

20,117

 

 

 

18,565

 

Accrued income taxes

 

 

2,585

 

 

 

1,831

 

Accrued profit sharing

 

 

8,971

 

 

 

8,203

 

Accrued warranty

 

 

1,753

 

 

 

1,670

 

Total current liabilities

 

 

85,802

 

 

 

87,213

 

Notes and loans payable (Note 4)

 

 

24,813

 

 

 

24,790

 

Finance lease payable, net of current portion

 

 

36,591

 

 

 

36,961

 

Other non-current liabilities

 

 

7,741

 

 

 

7,707

 

Total liabilities

 

 

154,947

 

 

 

156,671

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value, 20,000,000 shares authorized, no shares
   issued or outstanding

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 75,183,851
   issued and
46,143,481 shares outstanding on July 31, 2023 and 75,029,300
   shares issued and
45,988,930 shares outstanding on April 30, 2023

 

 

75

 

 

 

75

 

Additional paid-in capital

 

 

284,176

 

 

 

283,666

 

Retained earnings

 

 

520,766

 

 

 

523,184

 

Accumulated other comprehensive income

 

 

73

 

 

 

73

 

Treasury stock, at cost (29,040,370 shares on July 31, 2023 and
   April 30, 2023)

 

 

(422,375

)

 

 

(422,375

)

Total stockholders’ equity

 

 

382,715

 

 

 

384,623

 

Total liabilities and stockholders' equity

 

$

537,662

 

 

$

541,294

 

 

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

4


 

SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

For the Three Months Ended July 31,

 

 

2023

 

 

2022

 

 

(In thousands, except per share data)

 

Net sales

$

114,243

 

 

$

84,394

 

Cost of sales

 

83,842

 

 

 

52,923

 

Gross profit

 

30,401

 

 

 

31,471

 

Operating expenses:

 

 

 

 

 

Research and development

 

1,799

 

 

 

1,673

 

Selling, marketing, and distribution

 

10,040

 

 

 

8,027

 

General and administrative

 

14,213

 

 

 

17,854

 

Total operating expenses

 

26,052

 

 

 

27,554

 

Operating income

 

4,349

 

 

 

3,917

 

Other income/(expense), net:

 

 

 

 

 

Other income/(expense), net

 

47

 

 

 

673

 

Interest income/(expense), net

 

153

 

 

 

(433

)

Total other income/(expense), net

 

200

 

 

 

240

 

Income from operations before income taxes

 

4,549

 

 

 

4,157

 

Income tax expense

 

1,431

 

 

 

845

 

Net income

$

3,118

 

 

$

3,312

 

Net income per share:

 

 

 

 

 

Basic - net income

$

0.07

 

 

$

0.07

 

Diluted - net income

$

0.07

 

 

$

0.07

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

46,103

 

 

 

45,739

 

Diluted

 

46,551

 

 

 

46,102

 

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

5


 

SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Common

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

Total

 

 

 

Stock

 

Paid-In

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Stockholders’

 

(In thousands)

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Shares

 

Amount

 

 

Equity

 

Balance at April 30, 2022

 

 

74,641

 

$

75

 

$

278,101

 

$

504,640

 

$

73

 

 

29,040

 

$

(422,375

)

$

360,514

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,177

 

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

 

 

170

 

 

 

 

 

 

(981

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(981

)

Dividends issued

 

 

 

 

 

 

 

 

(4,576

)

 

 

 

 

 

 

 

 

(4,576

)

Net income

 

 

 

 

 

 

 

 

 

 

3,312

 

 

 

 

 

 

 

 

 

 

 

 

3,312

 

Balance at July 31, 2022

 

 

74,811

 

$

75

 

$

278,297

 

$

503,376

 

$

73

 

 

29,040

 

$

(422,375

)

$

359,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2023

 

 

75,029

 

$

75

 

$

283,666

 

$

523,184

 

$

73

 

 

29,040

 

$

(422,375

)

$

384,623

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,276

 

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

 

 

155

 

 

 

 

 

 

(766

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(766

)

Dividends issued

 

 

 

 

 

 

 

 

(5,536

)

 

 

 

 

 

 

 

 

(5,536

)

Net income

 

 

 

 

 

 

 

 

 

 

3,118

 

 

 

 

 

 

 

 

 

 

 

 

3,118

 

Balance at July 31, 2023

 

 

75,184

 

$

75

 

$

284,176

 

$

520,766

 

$

73

 

 

29,040

 

$

(422,375

)

$

382,715

 

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

6


 

SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months Ended July 31,

 

 

 

2023

 

 

2022

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

3,118

 

 

$

3,312

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

9,253

 

 

 

7,549

 

Loss/(gain) on sale/disposition of assets

 

 

3

 

 

 

(46

)

Provision for recoveries on notes and accounts receivable

 

 

(6

)

 

 

(21

)

Stock-based compensation expense

 

 

1,276

 

 

 

1,177

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

26,995

 

 

 

38,935

 

Inventories

 

 

6,363

 

 

 

(45,841

)

Prepaid expenses and other current assets

 

 

(3,825

)

 

 

(3,324

)

Income taxes

 

 

915

 

 

 

353

 

Accounts payable

 

 

(1,838

)

 

 

2,721

 

Accrued payroll and incentives

 

 

1,551

 

 

 

(1,435

)

Accrued profit sharing

 

 

768

 

 

 

3,488

 

Accrued expenses and deferred revenue

 

 

(4,135

)

 

 

1,119

 

Accrued warranty

 

 

83

 

 

 

(75

)

Other assets

 

 

75

 

 

 

206

 

Other non-current liabilities

 

 

34

 

 

 

(973

)

Net cash provided by operating activities

 

 

40,630

 

 

 

7,145

 

Cash flows from investing activities:

 

 

 

 

 

 

Payments to acquire patents and software

 

 

(33

)

 

 

(94

)

Proceeds from sale of property and equipment

 

 

23

 

 

 

46

 

Payments to acquire property and equipment

 

 

(32,057

)

 

 

(11,538

)

Net cash used in investing activities

 

 

(32,067

)

 

 

(11,586

)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on finance lease obligation

 

 

(338

)

 

 

(278

)

Dividend distribution

 

 

(5,536

)

 

 

(4,576

)

Payment of employee withholding tax related to
   restricted stock units

 

 

(766

)

 

 

(981

)

Net cash used in financing activities

 

 

(6,640

)

 

 

(5,835

)

Net increase/(decrease) in cash and cash equivalents

 

 

1,923

 

 

 

(10,276

)

Cash and cash equivalents, beginning of period

 

 

53,556

 

 

120,728

 

Cash and cash equivalents, end of period

 

$

55,479

 

 

$

110,452

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest, net of amounts capitalized

 

$

525

 

 

$

546

 

Income taxes

 

$

494

 

 

$

551

 

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 Three Months Ended July 31,

 

 

 

2023

 

 

2022

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

 

$

17,144

 

 

$

21,510

 

Capital lease included in accrued expenses and finance lease payable

 

 

734

 

 

 

 

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

8


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 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, firearm 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. During the quarter ended July 31, 2023, we began moving inventory into our new Maryville, Tennessee facility and began distribution activities from there in August 2023. 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 certain of our other manufacturing operations to the new facility being constructed in Maryville. 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 July 31, 2023, the condensed consolidated statements of income for the three months ended July 31, 2023 and 2022, the condensed consolidated statements of changes in stockholders’ equity for the three months ended July 31, 2023 and 2022, and the condensed consolidated statements of cash flows for the three months ended July 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 the three months ended July 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, 2023 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 2023 Form 10-K. The results of operations for the three months ended July 31, 2023 may not be indicative of the results that may be expected for the fiscal year ending April 30, 2024, or any other period.

(3) Leases:

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

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

Many of our leases include renewal options that enable us to extend the lease term. The execution of those renewal options is at our sole discretion and renewals 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 Months Ended July 31, 2023 and 2022

 

The amounts of assets and liabilities related to our operating and financing leases as of July 31, 2023 were as follows (in thousands):

 

 

 

Balance Sheet Caption

 

July 31, 2023

 

Operating Leases

 

 

 

 

 

Right-of-use assets

 

 

 

$

5,994

 

Accumulated amortization

 

 

 

 

(4,476

)

Right-of-use assets, net

 

Other assets

 

$

1,518

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

$

996

 

Non-current liabilities

 

Other non-current liabilities

 

 

737

 

Total operating lease liabilities

 

 

 

$

1,733

 

Finance Leases

 

 

 

 

 

Right-of-use assets

 

 

 

$

41,631

 

Accumulated depreciation

 

 

 

 

(10,014

)

Right-of-use assets, net

 

Property, plant, and equipment, net

 

$

31,617

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

$

1,466

 

Non-current liabilities

 

Finance lease payable, net of current portion

 

 

36,591

 

Total finance lease liabilities

 

 

 

$

38,057

 

During the three months ended July 31, 2023, we recorded $386,000 of operating lease costs, of which $26,000 related to short-term leases that were not recorded as right-of-use assets. We recorded $566,000 of finance lease amortization and $474,000 of financing lease interest expense for the three months ended July 31, 2023. As of July 31, 2023, the weighted average lease term and weighted average discount rate for our operating leases was 2.8 years and 4.4%, respectively. As of July 31, 2023, the weighted average lease term and weighted average discount rate for our financing leases were 15.1 years and 5.0%, respectively, and consisted primarily of our Missouri distribution center. The building is pledged to secure the amounts outstanding. The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight-line basis over the life of the lease.

On October 26, 2017, we entered into (a) a lease agreement with Ryan Boone County, LLC, or the Original Missouri Landlord, concerning certain real property located in Boone County, Missouri on which we had, until recently, been operating a distribution center, or the Missouri Lease, and (b) a guaranty in favor of the Original Missouri 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 59.0% of our Missouri distribution center under the same terms as the Missouri Lease, or the Missouri Sublease. On July 16, 2022, we entered into an amendment to the Sublease, increasing the leased space to 64.7% of the facility under the same terms as the Missouri Lease. On January 31, 2023, we entered into (i) an assignment and assumption agreement with AOUT, pursuant to which AOUT will assume all of our rights, entitlement, and obligations in, to, and under the Missouri Lease, in each case effective on January 1, 2024, subject to a number of conditions precedent, or the Assignment and Assumption Agreement, and (ii) an amended and restated guaranty in favor of RCS-S&W Facility, LLC, as successor in interest to the Original Missouri Landlord, pursuant to which Smith & Wesson Sales Company was added as a guarantor, or the Amended and Restated Guaranty. We intend to terminate the Missouri Sublease on or around the effective date of the Assignment and Assumption Agreement. As of July 31, 2023, income related to the Missouri Sublease was $581,000, of which $289,000 was recorded in general and administrative expenses and $292,000 was recorded in interest expense, net, in our condensed consolidated statements of income. In addition, we intend to occupy our Connecticut facility through the lease term. As of July 31, 2023, we do not believe there are any indications of impairment relating to these right-of-use assets.

10


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 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 July 31, 2023 (in thousands):

 

Fiscal

 

Amount

 

2024

 

$

1,917

 

2025

 

 

3,180

 

2026

 

 

3,235

 

2027

 

 

3,292

 

2028

 

 

3,350

 

Thereafter

 

 

38,906

 

Total future sublease receipts

 

 

53,880

 

Less amounts representing interest

 

 

(16,697

)

Present value of sublease receipts

 

$

37,183

 

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

 

 

 

Operating

 

 

Financing

 

 

Total

 

2024

 

 

 

$

1,007

 

 

$

2,507

 

 

$

3,514

 

2025

 

 

 

 

324

 

 

 

3,378

 

 

 

3,702

 

2026

 

 

 

 

301

 

 

 

3,433

 

 

 

3,734

 

2027

 

 

 

 

272

 

 

 

3,490

 

 

 

3,762

 

2028

 

 

 

 

125

 

 

 

3,416

 

 

 

3,541

 

Thereafter

 

 

 

 

 

 

 

38,907

 

 

 

38,907

 

Total future lease payments