Smith & Wesson Brands(SWBI) - 2022 Q3 - Quarterly Report

PART I Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the three and nine months ended January 31, 2022 and 2021, including balance sheets, income, equity, and cash flows, with detailed notes Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Jan 31, 2022 | April 30, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $107,268 | $113,017 | | Inventories | $134,268 | $78,477 | | Total current assets | $300,676 | $268,253 | | Total assets | $469,305 | $446,388 | | Total current liabilities | $93,044 | $125,655 | | Total liabilities | $142,996 | $180,004 | | Total stockholders' equity | $326,309 | $266,384 | Condensed Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | Q3 FY2022 | Q3 FY2021 | YTD FY2022 | YTD FY2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $177,738 | $257,634 | $682,826 | $736,247 | | Gross profit | $70,399 | $109,679 | $302,336 | $303,174 | | Operating income from continuing operations | $39,722 | $80,381 | $205,001 | $203,500 | | Income from continuing operations | $30,542 | $62,263 | $158,359 | $154,679 | | Diluted EPS - continuing operations | $0.65 | $1.12 | $3.28 | $2.75 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Jan 31, 2022 | Nine Months Ended Jan 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $112,275 | $196,308 | | Net cash used in investing activities | ($15,211) | ($19,713) | | Net cash used in financing activities | ($102,813) | ($241,930) | | Net decrease in cash and cash equivalents | ($5,749) | ($65,335) | Note 3 - Discontinued Operations The company completed the spin-off of its outdoor products business (AOUT) on August 24, 2020, reporting its historical data as discontinued operations - The separation of the outdoor products and accessories business (AOUT) was completed on August 24, 2020, with AOUT becoming an independent, publicly traded company[29][31] - For the nine months ended January 31, 2021, income from discontinued operations, net of tax, was $8.3 million[32][34] Note 9 - Stockholders' Equity The company returned capital to shareholders through $90.0 million in stock repurchases, with diluted EPS from continuing operations at $3.28 for the nine months - During the nine months ended January 31, 2022, the company completed two stock repurchase programs, buying back a total of 4,755,572 shares for $90.0 million using cash on hand[56] Earnings Per Share (Continuing Operations) - Nine Months Ended Jan 31 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Basic EPS | $3.32 | $2.79 | | Diluted EPS | $3.28 | $2.75 | Note 10 - Commitments and Contingencies The company is involved in significant legal proceedings and is committed to a headquarters relocation to Tennessee, requiring substantial capital expenditures - The company is a defendant in multiple lawsuits, including actions by the Mexican Government and a putative class action regarding the M&P12 shotgun, believing the claims are without merit and intending to defend them aggressively[72][73] - Announced a plan to move headquarters and significant operations to Maryville, Tennessee, committing to invest at least $120.0 million in capital expenditures by the end of 2025 and create no less than 620 new jobs[79] - As part of the relocation, the company plans to vacate and sublease its Missouri distribution facility and relocate a portion of its Connecticut plastic injection molding operations[80][81] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses decreased net sales, mixed gross margin performance, ongoing Tennessee relocation capital expenditures, and capital returns Results of Operations Net sales decreased in Q3 and the nine-month period due to normalizing firearm demand, with mixed gross margin performance and changes in operating expenses Net Sales by Product - Q3 (in thousands) | Product Line | Q3 FY2022 | Q3 FY2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Handguns | $132,921 | $183,106 | ($50,185) | -27.4% | | Long Guns | $29,459 | $61,581 | ($32,122) | -52.2% | | Total Sales | $177,738 | $257,634 | ($79,896) | -31.0% | - The decrease in firearm demand from the prior year's quarter is attributed to a normalization following heightened demand driven by civil unrest, COVID restrictions, and fears of firearm restrictions in the prior period[89] Net Sales by Product - Nine Months (in thousands) | Product Line | YTD FY2022 | YTD FY2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Handguns | $488,303 | $509,315 | ($21,012) | -4.1% | | Long Guns | $157,470 | $191,416 | ($33,946) | -17.7% | | Total Revenue | $682,826 | $736,247 | ($53,421) | -7.3% | - Gross margin for the nine months ended Jan 31, 2022 increased by 310 basis points to 44.3%, primarily due to price increases, favorable fixed cost absorption, and a shift to higher-margin products[101] Liquidity and Capital Resources Operating cash flow decreased due to increased inventory, with cash used for stock repurchases and dividends, and significant capital expenditures planned Cash Flow Summary - Nine Months Ended Jan 31 (in thousands) | Activity | 2022 | 2021 | $ Change | | :--- | :--- | :--- | :--- | | Operating activities | $112,275 | $198,437 | ($86,162) | | Investing activities | ($15,211) | ($18,570) | $3,359 | | Financing activities | ($102,813) | ($241,764) | $138,951 | - Cash from operations was negatively impacted by a $75.1 million incremental increase in inventory as the company replenished stock and built for potential demand increases[115] - The company expects to spend an aggregate of not less than $120.0 million on capital expenditures for the Tennessee relocation on or before December 31, 2025[117] - During the nine months ended January 31, 2022, the company repurchased $90.0 million of its common stock and distributed $11.4 million in dividends[118] Quantitative and Qualitative Disclosures About Market Risk The company reports no engagement in or outstanding forward option contracts during the period ended January 31, 2022 - During the period ended January 31, 2022, the company did not enter into or have any outstanding forward option contracts[129] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of January 31, 2022, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that as of January 31, 2022, the company's disclosure controls and procedures were effective[130] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[131] PART II - OTHER INFORMATION Legal Proceedings This section incorporates by reference the detailed discussion of legal proceedings from Note 10 of the financial statements - Information regarding legal proceedings is incorporated by reference from Note 10—Commitments and Contingencies in the financial statements section of this report[134] Risk Factors The company outlines significant risks associated with its planned relocation to Maryville, Tennessee, including budget overruns, delays, and workforce challenges - The company identifies several risks related to its planned relocation to Maryville, Tennessee, announced on September 30, 2021[135] - Key risks include not completing the relocation on time or within budget, failing to meet spending and hiring commitments required for incentives, and experiencing business disruption due to loss of historical knowledge and challenges in recruiting and retaining employees[137] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activities, including the completion of two programs totaling $90.0 million in buybacks during the nine months Share Repurchases - Nine Months Ended Jan 31, 2022 | Total Shares Purchased | Average Price Paid Per Share | Total Cost (in thousands) | | :--- | :--- | :--- | | 4,755,572 | $18.91 | $90,000 | - The company completed a $100.0 million stock repurchase program (authorized March 2021) and a subsequent $50.0 million program (authorized June 2021) during the nine months ended January 31, 2022[138] Exhibits This section states that the exhibits filed with this Quarterly Report on Form 10-Q are listed in the accompanying Index to Exhibits - The exhibits filed with this report are listed on the Index to Exhibits[139][141]