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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, 2022

Commission File No. 001-31552

 

 

img124948101_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 45,774,553 shares of common stock, par value $0.001, outstanding as of September 6, 2022.

 


 

SMITH & WESSON BRANDS, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended July 31, 2022 and 2021

 

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

 

18

 

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®, 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®, 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®, Silencer Subsonic®, 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®, Weather Shield®, and World Class Silencers® are some of the registered U.S. trademarks of our company or one of our subsidiaries. C.O.R.E.™, SW Equalizer™, GM-S1™, Redux™, Oath™, Nerve™, Empowering Americans™, GunSmarts™, S&W500™, SD™, SDVE™, Sport™, SW1911™, Volunteer™, Cheap Shot™, Impact!™, Impact!SB™, Katahdin™, Maxi-Ball™, Natural Lube 1000 Plus™, Pro Hunter™, Pro Hunter FX™, Pro Hunter XT™, Quickshot™, Speed Shot™, Strike™, Super Glide™, Venture™, Alpine™, 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 that we plan to move our headquarters and certain of our manufacturing operations to a new facility being constructed in Maryville, Tennessee; regarding the impact, if any, of recently issued accounting standards on our consolidated financial statements; lease payments for future periods; estimated amortization expense of intangible assets for future periods; the outcome of the lawsuits to which we are subject and their effect on us; our belief that the claims asserted by Gemini (as defined herein), the Mexican Government and plaintiffs in a putative class action in actions against us have no merit and that we intend to aggressively defend these actions; our belief with respect to the various matters described in the 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, as part of the Relocation (as defined herein), to vacate and sublease our Missouri distribution facility; our belief that we will not incur an impairment associated with the lease associated with our Missouri distribution 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; 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 expectation to incur capital expenditures in connection with the construction and equipping of the new facility in Maryville, Tennessee in an aggregate amount of no less than $120.0 million on or before December 31, 2025; our belief that a pull forward of our products will correct in the coming quarters as channel inventory continues to normalize and as we launch new products; 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 slightly increase in the short term but will decline by the end of the fiscal year due to normal seasonality; our expectation on spending 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)

 

 

 

As of:

 

 

 

July 31, 2022

 

 

April 30, 2022

 

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

110,452

 

 

$

120,728

 

Accounts receivable, net of allowances for credit losses of $15 on
   July 31, 2022 and $
36 on April 30, 2022

 

 

23,781

 

 

 

62,695

 

Inventories

 

 

182,501

 

 

 

136,660

 

Prepaid expenses and other current assets

 

 

8,893

 

 

 

5,569

 

Income tax receivable

 

 

748

 

 

 

1,945

 

Total current assets

 

 

326,375

 

 

 

327,597

 

Property, plant, and equipment, net

 

 

160,793

 

 

 

135,591

 

Intangibles, net

 

 

3,614

 

 

 

3,608

 

Goodwill

 

 

19,024

 

 

 

19,024

 

Deferred income taxes

 

 

1,221

 

 

 

1,221

 

Other assets

 

 

10,229

 

 

 

10,435

 

Total assets

 

$

521,256

 

 

$

497,476

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

53,865

 

 

$

30,042

 

Accrued expenses and deferred revenue

 

 

24,628

 

 

 

23,482

 

Accrued payroll and incentives

 

 

15,936

 

 

 

17,371

 

Accrued income taxes

 

 

1,829

 

 

 

2,673

 

Accrued profit sharing

 

 

17,031

 

 

 

13,543

 

Accrued warranty

 

 

1,763

 

 

 

1,838

 

Total current liabilities

 

 

115,052

 

 

 

88,949

 

Finance lease payable, net of current portion

 

 

37,323

 

 

 

37,628

 

Other non-current liabilities

 

 

9,435

 

 

 

10,385

 

Total liabilities

 

 

161,810

 

 

 

136,962

 

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, 74,810,967
   issued and
45,770,597 shares outstanding on July 31, 2022 and 74,641,439
   shares issued and
45,601,069 shares outstanding on April 30, 2022

 

 

75

 

 

 

75

 

Additional paid-in capital

 

 

278,297

 

 

 

278,101

 

Retained earnings

 

 

503,376

 

 

 

504,640

 

Accumulated other comprehensive income

 

 

73

 

 

 

73

 

Treasury stock, at cost (29,040,370 shares on July 31, 2022 and
   April 30, 2022)

 

 

(422,375

)

 

 

(422,375

)

Total stockholders’ equity

 

 

359,446

 

 

 

360,514

 

Total liabilities and stockholders' equity

 

$

521,256

 

 

$

497,476

 

 

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,

 

 

2022

 

 

2021

 

 

(In thousands, except per share data)

 

Net sales

$

84,394

 

 

$

274,609

 

Cost of sales

 

52,923

 

 

 

144,667

 

Gross profit

 

31,471

 

 

 

129,942

 

Operating expenses:

 

 

 

 

 

Research and development

 

1,673

 

 

 

1,808

 

Selling, marketing, and distribution

 

8,027

 

 

 

10,634

 

General and administrative

 

17,854

 

 

 

17,614

 

Total operating expenses

 

27,554

 

 

 

30,056

 

Operating income

 

3,917

 

 

 

99,886

 

Other income/(expense), net:

 

 

 

 

 

Other income/(expense), net

 

673

 

 

 

660

 

Interest expense, net

 

(433

)

 

 

(544

)

Total other income/(expense), net

 

240

 

 

 

116

 

Income from operations before income taxes

 

4,157

 

 

 

100,002

 

Income tax expense

 

845

 

 

 

23,120

 

Net income

$

3,312

 

 

$

76,882

 

Net income per share:

 

 

 

 

 

Basic - net income

$

0.07

 

 

$

1.59

 

Diluted - net income

$

0.07

 

 

$

1.57

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

45,739

 

 

 

48,394

 

Diluted

 

46,102

 

 

 

49,050

 

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, 2021

 

 

74,222

 

 

$

74

 

 

$

273,431

 

 

$

325,181

 

 

$

73

 

 

 

24,285

 

 

$

(332,375

)

 

$

266,384

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,452

 

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

 

 

76

 

 

 

 

 

 

(815

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(815

)

Repurchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

1,967

 

 

 

(40,000

)

 

 

(40,000

)

Dividends issued

 

 

 

 

 

 

 

 

(3,844

)

 

 

 

 

 

 

 

 

(3,844

)

Net income

 

 

 

 

 

 

 

 

 

 

76,882

 

 

 

 

 

 

 

 

 

 

 

 

76,882

 

Balance at July 31, 2021

 

 

74,298

 

 

 

74

 

 

 

274,068

 

 

 

398,219

 

 

 

73

 

 

 

26,252

 

 

 

(372,375

)

 

 

300,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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,

 

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

3,312

 

 

$

76,882

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

7,549

 

 

 

7,466

 

(Gain)/loss on sale/disposition of assets

 

 

(46

)

 

 

57

 

Provision for recoveries on notes and accounts receivable

 

 

(21

)

 

 

(56

)

Stock-based compensation expense

 

 

1,177

 

 

 

1,452

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

38,935

 

 

 

26,300

 

Inventories

 

 

(45,841

)

 

 

(18,663

)

Prepaid expenses and other current assets

 

 

(3,324

)

 

 

(96

)

Income taxes

 

 

353

 

 

 

21,988

 

Accounts payable

 

 

2,721

 

 

 

(2,443

)

Accrued payroll and incentives

 

 

(1,435

)

 

 

(9,114

)

Accrued profit sharing

 

 

3,488

 

 

 

3,834

 

Accrued expenses and deferred revenue

 

 

1,119

 

 

 

405

 

Accrued warranty

 

 

(75

)

 

 

(297

)

Other assets

 

 

206

 

 

 

1,677

 

Other non-current liabilities

 

 

(973

)

 

 

(305

)

Net cash provided by operating activities

 

 

7,145

 

 

 

109,087

 

Cash flows from investing activities:

 

 

 

 

 

 

Payments to acquire patents and software

 

 

(94

)

 

 

(69

)

Proceeds from sale of property and equipment

 

 

46

 

 

 

70

 

Payments to acquire property and equipment

 

 

(11,538

)

 

 

(5,769

)

Net cash used in investing activities

 

 

(11,586

)

 

 

(5,768

)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on finance lease obligation

 

 

(278

)

 

 

(264

)

Payments to acquire treasury stock

 

 

 

 

 

(40,000

)

Dividend distribution

 

 

(4,576

)

 

 

(3,844

)

Payment of employee withholding tax related to
   restricted stock units

 

 

(981

)

 

 

(815

)

Net cash used in financing activities

 

 

(5,835

)

 

 

(44,923

)

Net (decrease)/increase in cash and cash equivalents

 

 

(10,276

)

 

 

58,396

 

Cash and cash equivalents, beginning of period

 

 

120,728

 

 

 

113,017

 

Cash and cash equivalents, end of period

 

$

110,452

 

 

$

171,413

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

546

 

 

$

538

 

Income taxes

 

$

551

 

 

$

1,131

 

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,

 

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

 

$

21,510

 

 

$

435

 

 

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, 2022 and 2021

 

 

 

(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 to a new facility being constructed in Maryville, Tennessee. See Note 9 — Commitments and Contingencies, for more information regarding this plan.

(2) Basis of Presentation:

Interim Financial Information – The condensed consolidated balance sheet as of July 31, 2022, the condensed consolidated statements of income for the three months ended July 31, 2022 and 2021, the condensed consolidated statements of changes in stockholders’ equity for the three months ended July 31, 2022 and 2021, and the condensed consolidated statements of cash flows for the three months ended July 31, 2022 and 2021 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, 2022 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 months ended July 31, 2022 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 commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit interest rate. We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our lease agreements do not require material variable lease payments, residual value guarantees, or restrictive covenants. For operating leases, we recognize expense on a straight-line basis over the lease term. We record tenant improvement allowances as an offsetting adjustment included in our calculation of the respective right-of-use asset.

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

9


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2022 and 2021

 

The amounts of assets and liabilities related to our operating and financing leases as of July 31, 2022 were as follows (in thousands):

 

 

 

Balance Sheet Caption

 

July 31, 2022

 

Operating Leases

 

 

 

 

 

Right-of-use assets

 

 

 

$

7,297

 

Accumulated amortization

 

 

 

 

(4,010

)

Right-of-use assets, net

 

Other assets

 

$

3,287

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

$

1,613

 

Non-current liabilities

 

Other non-current liabilities

 

 

1,925

 

Total operating lease liabilities

 

 

 

$

3,538

 

Finance Leases

 

 

 

 

 

Right-of-use assets

 

 

 

$

40,986

 

Accumulated depreciation

 

 

 

 

(6,858

)

Right-of-use assets, net

 

Property, plant, and equipment, net

 

$

34,128

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

$

1,186

 

Non-current liabilities

 

Finance lease payable, net of current portion

 

 

37,323

 

Total finance lease liabilities

 

 

 

$

38,509

 

For the three months ended July 31, 2022, we recorded $446,000 of operating lease costs, of which $30,000 related to short-term leases that were not recorded as right-of-use assets. We recorded $523,000 of financing lease amortization and $484,000 of financing lease interest expense for the three months ended July 31, 2022. As of July 31, 2022, our weighted average lease term and weighted average discount rate for our operating leases were 3.0 years and 4.4%, respectively. As of July 31, 2022, our weighted average lease term and weighted average discount rate for our financing leases were 16.3 years and 5.0%, respectively, and consisted primarily of our Missouri distribution facility. The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight-line basis over the life of the lease.

With the completion of the 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 facility under the same terms as the master lease. On July 16, 2022, we entered into an amendment to the sublease agreement, increasing the leased space to 64.7% of the facility under the same terms as the master lease. For the three months ended July 31, 2022, we recorded $544,000 of income related to this sublease agreement, which was recorded in other income in our condensed consolidated statements of income.

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, 2022 (in thousands):

 

Fiscal

 

Amount

 

2023

 

$

1,541

 

2024

 

 

2,086

 

2025

 

 

2,123

 

2026

 

 

2,160

 

2027

 

 

2,198

 

Thereafter

 

 

28,658

 

Total future sublease receipts

 

 

38,766

 

Less amounts representing interest

 

 

(10,302

)

Present value of sublease receipts

 

$

28,464

 

 

10


SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2022 and 2021

 

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

 

 

 

 

 

Operating

 

 

Financing

 

 

Total

 

2023

 

 

 

$

1,332

 

 

$

2,310

 

 

$

3,642

 

2024

 

 

 

 

1,650

 

 

 

3,125

 

 

 

4,775

 

2025

 

 

 

 

324

 

 

 

3,180