Smith & Wesson Brands(SWBI) - 2021 Q4 - Annual Report

Part I Business Smith & Wesson, a leading U.S. firearms manufacturer, drives organic growth, quality, and efficiency, with strong FY21 demand Introduction Smith & Wesson, a leading global firearms manufacturer, spun off its outdoor products business in August 2020 - The company is a major manufacturer of a wide array of firearms and related products for consumer, law enforcement, and military customers worldwide[13] - On August 24, 2020, the company completed the spin-off of its outdoor products and accessories business, now reported as discontinued operations[14] Strategy The company seeks market leadership through organic growth, quality, efficiency, and maximizing capital returns - Core strategies include driving organic growth via brand leverage and new products, focusing on high-quality firearms, streamlining operations, and maximizing return on invested capital through investments, dividends, and share repurchases[19][20][21] - In fiscal 2021, the company generated $317.3 million in cash from operations, used to repay all debt, invest in capacity, pay its first dividend, and repurchase $110 million of stock[23] Products The company offers a broad firearms portfolio under Smith & Wesson and M&P, introducing new products and divesting Thompson/Center Arms - The company is a leader in the revolver market and a leader in the polymer pistol market with its M&P brand, introduced in 2005[25] - In fiscal 2021, the M&P Shield Plus, a high-capacity micro-compact pistol for concealed carry, was a notable new product introduction[29] - The company plans to divest its Thompson/Center Arms brand, focusing hunting and long-range shooting under the Smith & Wesson brand[47] Financial Performance (Continuing Operations) | Fiscal Year Ended April 30 | Net Sales | Gross Profit | Total Assets (End of Period) | | :--- | :--- | :--- | :--- | | 2021 | $1.1 billion | $449.0 million | $446.4 million | | 2020 | $529.6 million | $165.7 million | $486.4 million | | 2019 | $481.3 million | $146.3 million | N/A | Marketing, Sales, and Distribution The company uses multi-channel sales, with top distributors at 43.4% of sales, and diverse marketing including GUNSMARTS - The top five U.S. commercial distributors accounted for 43.4% of net sales from continuing operations in fiscal 2021[53] - International sales represented 2% of net sales from continuing operations in fiscal 2021, a decrease from 4% in 2020 and 5% in 2019[55] - The SMITH & WESSON GUNSMARTS program, a YouTube video series, was launched to educate new firearm owners on safety and usage[59] Human Capital As of May 31, 2021, the company employed 2,240 individuals, demonstrating strong safety and a diverse workforce - As of May 31, 2021, the company employed 2,240 people, with voluntary turnover less than 2% and an average tenure of 7.6 years[101][93] - The company's safety performance is strong, with a calendar year 2020 Total Recordable Incident Rate (TRIR) of 1.1, below the OSHA industry average of 2.1 for 2019[97] Workforce Demographics (as of April 30, 2021) | Category | Percentage | | :--- | :--- | | Gender | | | Male | 76% | | Female | 24% | | Ethnicity | | | Caucasian | 59% | | Hispanic/Latino/Latina | 27% | | Black | 10% | | Other/Undisclosed | 4% | Risk Factors The company faces diverse risks from economic, regulatory, social, political, operational, legal, and spin-off challenges - The business is highly sensitive to economic, social, political, and legislative factors, with demand surges and softening periods influenced by election concerns and potential gun control legislation[111][112] - Extensive regulation by the ATF and various state and local laws poses significant risk, with legislative changes like magazine capacity restrictions or PLCAA repeal potentially harming the business[115][119] - Critical dependence on the Springfield, Massachusetts manufacturing facility and Columbia, Missouri distribution center means any disruption could severely impact operations[133][136] - Social activist pressure on financial institutions, vendors, and customers to cease business with firearms manufacturers poses risks to relationships and brand reputation[204] - The AOUT spin-off may not achieve expected benefits, resulting in a smaller, less diversified company, with potential risk of substantial tax liability if deemed a taxable event[214][215] Properties Principal properties include owned manufacturing plants in MA and ME, a leased plant in CT, and a leased distribution center in MO Principal Operating Properties | Location | Facility Type | Ownership | | :--- | :--- | :--- | | Springfield, MA | Executive Offices & Plant | Owned | | Houlton, ME | Plant | Owned | | Deep River, CT | Plant | Leased | | Columbia, MO | Office & Warehouse | Leased | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SWBI common stock trades on Nasdaq; the company initiated a $8.2 million dividend and repurchased $110 million in shares in FY21 - The company's common stock trades on the Nasdaq Global Select Market under the ticker SWBI[226] - A quarterly dividend policy was initiated post-spin-off, with total dividends of $8.2 million paid in fiscal 2021[228] Fiscal 2021 Common Stock Repurchases | Period | Total Shares Purchased | Average Price Per Share | Total Cost | | :--- | :--- | :--- | :--- | | Dec 1, 2020 - Jan 31, 2021 | 2,737,489 | $18.24 | ~$50.0M | | Mar 1, 2021 - Apr 30, 2021 | 3,380,447 | $17.73 | ~$60.0M | | Total | 6,117,936 | $17.96 | ~$110.0M | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) FY21 was a record year with net sales doubling to $1.1 billion, gross margin at 42.4%, and net income surging to $243.6 million, enabling debt repayment and shareholder returns Results of Operations Net sales doubled to $1.1 billion in FY21 due to consumer demand, improving gross margin to 42.4% and surging operating income to $319.6 million Net Sales by Product Category (in thousands) | Product Category | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Handguns | $755,735 | $390,711 | 93.4% | | Long Guns | $253,340 | $101,540 | 149.5% | | Other Products & Services | $50,120 | $37,367 | 34.1% | | Total Revenue | $1,059,195 | $529,618 | 100.0% | Profitability Metrics | Metric | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Gross Profit | $449.0M | $165.7M | | Gross Margin | 42.4% | 31.3% | | Operating Income | $319.6M | $50.3M | | Operating Margin | 30.2% | 9.5% | - Increased sales and margins were driven by heightened consumer demand, attributed to concerns over the COVID-19 pandemic, personal protection, and potential new firearm regulations[242] - New products accounted for 17.3% of net sales for fiscal 2021[248] Liquidity and Capital Resources FY21 liquidity strengthened with $317.3 million operating cash flow, used to repay debt, fund a distribution, and repurchase $110.0 million in stock, resulting in no outstanding debt Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Operating Activities | $317,260 | $80,835 | | Investing Activities | ($22,261) | ($12,084) | | Financing Activities | ($303,758) | $3,380 | - Cash used in financing activities primarily consisted of a net repayment of $160.0 million on its credit facility and $110.0 million in share repurchases[277] - As of April 30, 2021, the company had no outstanding indebtedness and maintained a $100.0 million unsecured revolving line of credit[280] Controls and Procedures Disclosure controls were effective as of April 30, 2021, with a prior material weakness in goodwill impairment analysis successfully remediated in FY21 - Management concluded that disclosure controls and procedures were effective as of April 30, 2021[301] - A material weakness in goodwill impairment analysis, disclosed in fiscal 2020, was remediated as of April 30, 2021[307][308] Part III Directors, Executive Officers, Compensation, Security Ownership, and Accountant Fees Information for Items 10-14, covering directors, executive compensation, security ownership, and accountant fees, is incorporated by reference from the 2021 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[316][317][318] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including key AOUT spin-off and credit facility agreements - Lists all exhibits filed with the Form 10-K, including key agreements related to the AOUT spin-off and the company's credit facility[324][325] Consolidated Financial Statements Notes to Consolidated Financial Statements These notes detail the AOUT spin-off, debt repayment, significant share repurchases, dividend initiation, and ongoing litigation, supplementing financial statements - Discontinued Operations: The spin-off of the outdoor products and accessories business (AOUT) was completed on August 24, 2020, with historical financial data presented as discontinued operations, including a $25.0 million cash distribution to AOUT[409][412] - Financing: As of April 30, 2021, the company had no outstanding borrowings on its $100.0 million revolving line of credit[432] - Share Repurchases: In fiscal 2021, the company repurchased 6,117,936 shares for $110.0 million, and an additional 1,967,420 shares for $40.0 million post-fiscal year-end[457] - Litigation: The company is a defendant in multiple product liability cases, a dispute with Gemini Technologies over the Gemtech acquisition earn-out, and co-defendant in cases related to shootings in Gary, Indiana, Parkland, Florida, Toronto, Canada, and Poway, California[498][499][500]