Smith & Wesson Brands(SWBI) - 2023 Q4 - Annual Report

PART I ITEM 1. BUSINESS Smith & Wesson, a leading firearm manufacturer, is relocating to Maryville, Tennessee, focusing on organic growth and product innovation - Smith & Wesson is a leading manufacturer of firearms, including handguns, long guns, handcuffs, and firearm suppressors, sold under Smith & Wesson, M&P, and Gemtech brands[14] - The company's strategy focuses on driving organic growth through a robust new product pipeline, leveraging brands, enhancing retailer relationships, and expanding into complementary markets[19] - A major strategic initiative is the relocation of headquarters and significant operations to Maryville, Tennessee, with an expected aggregate capital expenditure of $160.0 million to $170.0 million through fiscal 2024[14][22][233] - New product introductions in fiscal 2023 included the Smith & Wesson M350 revolver, M&P9 M2.0 Metal pistol, Smith & Wesson Equalizer®, M&P 5.7, M&P FPC, and Performance Center M&P9 Competitor, as well as new Gemtech suppressors (Neutron 7.62, Abyss 5.56, GVAC™ 5.56 Upper system)[28][29][31] Net Sales and Gross Profit (Fiscal Years Ended April 30) | Metric | 2023 ($M) | 2022 ($M) | 2021 ($M) | |:---|:---|:---|:---|\ | Net Sales | 479.2 | 864.1 | 1,100.0 | | Gross Profit | 154.5 | 374.6 | 449.0 | | Total Assets (as of April 30) | 541.3 | 497.5 | N/A | Introduction Strategy Products Marketing, Sales, and Distribution Suppliers Facilities Research and Development Patents, Trademarks, and Copyrights Competition Customers Seasonality Governmental Regulations of Firearms Environmental Health and Safety Human Capital Information About our Executive Officers ITEM 1A. RISK FACTORS The company faces economic, political, regulatory, and operational risks, including relocation, supply chain, and legal challenges - Economic uncertainty, high unemployment, and declining consumer confidence can adversely impact discretionary spending on firearms[105] - Political and social factors, including elections and gun control legislation, create demand volatility and regulatory challenges, such as restrictions on firearm features or sales bans[106][108] - The ongoing relocation to Maryville, Tennessee, presents risks including potential budget overruns, delays, workforce transition issues, and diversion of management's time[130][131][132] - Supply chain disruptions, raw material price increases (exacerbated by inflation), and the inability to accurately forecast demand can lead to increased costs, reduced sales, and inventory issues[140][145][150] - The company is subject to various lawsuits and governmental investigations related to product liability, criminal misuse of firearms, and consumer protection, which can result in significant damages, legal costs, and reputational harm[169][170][171] - Maintaining strong brand recognition and reputation is critical, but faces risks from ineffective marketing, social media de-platforming, and negative publicity from product quality issues or recalls[152][156][157] - Cybersecurity risks, including data breaches and system disruptions, pose threats to operations, sensitive data, and could lead to significant costs and reputational damage[190][192] Risks Relating to Economic, Political, Social, Legislative, Regulatory, and Inflationary Factors Risks Relating to Manufacturing, the Relocation, Raw Materials and Component Supply, Product Development and Performance, Customer Demand, and Brand Recognition Risks Relating to Legal Proceedings, Product Recalls, and Other Product Liabilities Risks Relating to Intellectual Property, Information Systems, and Cybersecurity Risks Relating to Certain Business Matters and Securities Markets ITEM 1B. UNRESOLVED STAFF COMMENTS The company has no unresolved staff comments from the SEC - The company indicates that this item is not applicable, meaning there are no unresolved comments from the SEC staff[212] ITEM 2. PROPERTIES Smith & Wesson's principal operating properties include owned plants in Springfield, MA, and Houlton, ME, and a leased plant in Deep River, CT. The company also leases an office and warehouse in Columbia, MO (subleased 64.7%) and a new office in Maryville, TN, with a plant under construction there, reflecting the ongoing relocation Principal Operating Properties (as of April 30, 2023) | Location | Facility | Ownership Status | |:---|:---|:---|\ | Connecticut (Deep River) | Plant | Leased | | Maine (Houlton) | Plant | Owned | | Massachusetts (Springfield) | Executive Offices & Plant | Owned | | Missouri (Columbia) | Office & Warehouse | Leased — We sublease 64.7% of this facility | | Tennessee (Maryville) | Office | Leased | | Tennessee (Maryville, under construction) | Plant | Owned — Subject to the terms of certain real property and tax incentive agreements | ITEM 3. LEGAL PROCEEDINGS Information regarding the company's legal proceedings is incorporated by reference from Note 16 to its consolidated financial statements - Legal proceedings information is detailed in Note 16 of the consolidated financial statements[215] ITEM 4. MINE SAFETY DISCLOSURES The company states that this item is not applicable, indicating no disclosures related to mine safety are required - The company indicates that this item is not applicable[216] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Smith & Wesson's common stock trades on the Nasdaq Global Select Market under the symbol 'SWBI'. As of June 21, 2023, there were 885 record holders. The company has paid quarterly dividends since August 2020, with payments of $18.3 million in fiscal 2023 and $15.0 million in fiscal 2022. No share repurchase programs were authorized or executed in fiscal 2023 - Common stock trades on the Nasdaq Global Select Market under the symbol 'SWBI'[219] - As of June 21, 2023, there were 885 record holders of common stock[220] - The company has paid quarterly dividends since August 2020, with future payments dependent on financial condition and operating results[221] Dividend Payments | Fiscal Year | Dividends Paid ($M) | |:---|:---|\ | 2023 | 18.3 | | 2022 | 15.0 | - No authorized share repurchase programs or purchases of common stock were made during fiscal 2023[228] Market Information Holders Dividend Policy Securities Authorized for Issuance under Equity Compensation Plans Performance Graph Repurchases of Common Stock ITEM 6. RESERVED This item is reserved and contains no information ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Smith & Wesson's fiscal 2023 saw significant declines in sales and profit due to normalized demand and inventory reduction, alongside substantial relocation capital expenditures - Net sales decreased by $384.9 million (44.5%) in fiscal 2023 to $479.2 million, primarily due to normalized demand post-pandemic and distribution channel inventory reduction[233] - Gross profit decreased by $220.0 million (58.7%) in fiscal 2023, with gross margin falling by 11.1% to 32.2%, impacted by lower sales volume, inflation, and relocation expenses[233][241] - Net income for fiscal 2023 was $36.9 million ($0.80 per diluted share), a significant decrease from $194.5 million ($4.08 per diluted share) in fiscal 2022[233][255] - Capital expenditures for the Maryville relocation totaled $73.2 million in fiscal 2023, with an expected $70.0 million to $75.0 million in fiscal 2024 for construction[263][264] - Cash provided by operating activities decreased by $121.1 million (87.9%) to $16.7 million in fiscal 2023, mainly due to reduced net income[259][260] - The company had $53.6 million in cash and cash equivalents as of April 30, 2023, and believes existing capital resources and credit facilities are adequate for the next 12 months[273] - Inflationary pressures increased material, labor, and other costs in fiscal 2023, and are expected to have an increased impact in fiscal 2024[275] 2023 Highlights Key Performance Indicators External Factors that Impact the Firearm Industry Results of Operations Critical Accounting Estimates Recent Accounting Pronouncements Off-Balance Sheet Arrangements ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risk is related to the variable interest rate on its $100.0 million revolving line of credit, which was amended in April 2023 to replace LIBOR with SOFR as the interest rate benchmark. As of April 30, 2023, $25.0 million was outstanding at a 6.62% interest rate - The principal market risk is the variable interest rate associated with the $100.0 million revolving line of credit[296] - As of April 30, 2023, $25.0 million was outstanding on the Revolving Line at an interest rate of 6.62%[270][296] - The credit agreement was amended on April 28, 2023, to replace LIBOR with SOFR as the interest rate benchmark and to amend the definition of 'Consolidated Fixed Charge Coverage Ratio' to exclude unfinanced capital expenditures related to the Relocation[270][296] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section refers to the consolidated financial statements, notes, and auditor's report, which are incorporated by reference starting on page F-1 of the report - Consolidated financial statements, notes, and the auditor's report are incorporated by reference, commencing on page F-1[297] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The company states that there have been no changes in or disagreements with accountants on accounting and financial disclosure matters - The company indicates that this item is not applicable, meaning no changes in or disagreements with accountants[298] ITEM 9A. CONTROLS AND PROCEDURES Management, under the supervision of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of April 30, 2023. Internal control over financial reporting was also deemed effective based on the COSO Framework, and no material changes occurred in the fourth fiscal quarter of 2023 - Disclosure controls and procedures were evaluated and deemed effective as of April 30, 2023[300] - Management concluded that internal control over financial reporting was effective as of April 30, 2023, based on the 2013 COSO Framework[303] - Deloitte & Touche LLP audited and reported on the effectiveness of internal control over financial reporting[304] - No material changes in internal control over financial reporting occurred during the fourth fiscal quarter of 2023[307] Evaluation of Disclosure Controls and Procedures Management's Annual Report on Internal Control Over Financial Reporting Inherent Limitations on the Effectiveness of Controls and Procedures Changes in Internal Control over Financial Reporting ITEM 9B. OTHER INFORMATION The company states that this item is not applicable, indicating no other information is required to be disclosed - The company indicates that this item is not applicable[308] ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS The company states that this item is not applicable, indicating no disclosures regarding foreign jurisdictions that prevent inspections - The company indicates that this item is not applicable[309] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors and corporate governance is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders. Executive officer information is included in Item 1, 'Business — Executive Officers' of this report - Information on directors and corporate governance is incorporated by reference from the 2023 Proxy Statement[312] - Executive officer information is provided in Item 1, 'Business — Executive Officers' of this report[312] ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Executive compensation details are incorporated by reference from the 2023 Proxy Statement[313] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Security ownership information is incorporated by reference from the 2023 Proxy Statement[314] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information on related transactions and director independence is incorporated by reference from the 2023 Proxy Statement[315] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Principal accountant fees and services information is incorporated by reference from the 2023 Proxy Statement[316] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists the consolidated financial statements and schedules, along with a comprehensive list of exhibits filed with the 10-K report. These exhibits include various agreements, plans, and certifications, many of which are incorporated by reference from previous SEC filings - Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1[318] - All other schedules are omitted due to absence of conditions or information being shown in financial statements/notes[319] - A detailed list of exhibits, including separation agreements, bylaws, stock plans, lease agreements, and credit agreements, is provided, with many incorporated by reference[319][320][324] ITEM 16. FORM 10-K SUMMARY The company states that this item is not applicable, indicating no Form 10-K summary is provided - The company indicates that this item is not applicable[326] SIGNATURES The report is duly signed on behalf of Smith & Wesson Brands, Inc. by its President and Chief Executive Officer, Mark P. Smith, and other principal executive and financial officers and directors, as of June 22, 2023 - The report is signed by Mark P. Smith, President and Chief Executive Officer, and Deana L. McPherson, Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary, along with other directors[330][331] - The signing date for the report is June 22, 2023[330] INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP, the independent registered public accounting firm, issued an unqualified opinion on Smith & Wesson's consolidated financial statements for the period ended April 30, 2023, and on the effectiveness of its internal control over financial reporting. Critical audit matters included the evaluation of property, plant, and equipment for impairment due to the relocation, and the determination of applicable severance charges related to the relocation - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements for the period ended April 30, 2023, and on the effectiveness of internal control over financial reporting[337] - Critical audit matters included the evaluation of Property, Plant, and Equipment for impairment as a result of the Relocation, due to significant assumptions and judgments in determining recoverability[345][346] - Another critical audit matter was the determination of applicable severance charges to Operating Expenses as a result of the Relocation, involving high auditor judgment in evaluating management's assumptions[348][349] Consolidated Balance Sheets as of April 30, 2023 and 2022 The consolidated balance sheets show an increase in total assets from $497.5 million in 2022 to $541.3 million in 2023, driven primarily by an increase in property, plant, and equipment and inventories. Total liabilities also increased from $137.0 million to $156.7 million, mainly due to notes and loans payable. Stockholders' equity increased from $360.5 million to $384.6 million Consolidated Balance Sheet Highlights (in thousands) | Metric | April 30, 2023 | April 30, 2022 | |:---|:---|:---|\ | Total Assets | $541,294 | $497,476 | | Total Current Assets | $291,920 | $327,597 | | Property, Plant, and Equipment, net | $210,330 | $135,591 | | Total Liabilities | $156,671 | $136,962 | | Total Current Liabilities | $87,213 | $88,949 | | Notes and Loans Payable | $24,790 | $0 | | Total Stockholders' Equity | $384,623 | $360,514 | - Cash and cash equivalents decreased from $120.7 million in 2022 to $53.6 million in 2023[353] - Inventories increased from $136.7 million in 2022 to $177.1 million in 2023[353] Consolidated Statements of Income for the years ended April 30, 2023, 2022, and 2021 The consolidated statements of income show a significant decline in net sales, gross profit, and net income in fiscal 2023 compared to prior years. Net sales decreased by 44.5% from fiscal 2022, leading to an 81.0% drop in net income. Diluted EPS also fell sharply from $4.08 in fiscal 2022 to $0.80 in fiscal 2023 Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | 2023 | 2022 | 2021 | |:---|:---|:---|:---|\ | Net sales | $479,242 | $864,126 | $1,059,195 | | Gross profit | $154,537 | $374,564 | $448,983 | | Operating income from continuing operations | $48,407 | $251,653 | $319,632 | | Income from continuing operations before income taxes | $48,226 | $252,386 | $317,965 | | Income tax expense | $11,350 | $57,892 | $74,394 | | Net income | $36,876 | $194,494 | $252,049 | | Diluted EPS | $0.80 | $4.08 | $4.55 | - Net sales decreased by 44.5% from fiscal 2022 to fiscal 2023[356] - Net income decreased by 81.0% from fiscal 2022 to fiscal 2023[356] Consolidated Statements of Changes in Stockholders' Equity for the years ended April 30, 2023, 2022, and 2021 The consolidated statements of changes in stockholders' equity show an increase in total stockholders' equity from $360.5 million in 2022 to $384.6 million in 2023. This was primarily driven by net income of $36.9 million and stock-based compensation, partially offset by dividend distributions of $18.3 million. The company completed its share repurchase programs in fiscal 2022, with no repurchases in fiscal 2023 Changes in Stockholders' Equity (in thousands) | Metric | April 30, 2023 | April 30, 2022 | April 30, 2021 | |:---|:---|:---|:---|\ | Total Stockholders' Equity | $384,623 | $360,514 | $266,384 | | Net Income | $36,876 | $194,494 | $252,049 | | Stock-based Compensation | $5,102 | $4,536 | $4,706 | | Dividends Issued | $(18,333) | $(15,035) | $(8,223) | | Repurchase of Treasury Stock | $0 | $(90,000) | $(110,000) | - No treasury stock was repurchased in fiscal 2023, following $90.0 million in repurchases in fiscal 2022[358] Consolidated Statements of Cash Flows for the years ended April 30, 2023, 2022, and 2021 The consolidated statements of cash flows show a net decrease in cash and cash equivalents of $67.2 million in fiscal 2023, a reversal from a net increase of $7.7 million in fiscal 2022. This was primarily due to a significant reduction in cash from operating activities and increased cash used in investing activities, largely for the Maryville relocation, partially offset by cash provided by financing activities from new borrowings Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | 2023 | 2022 | 2021 | |:---|:---|:---|:---|\ | Operating activities | $16,732 | $137,814 | $315,334 | | Investing activities | $(89,781) | $(24,116) | $(23,404) | | Financing activities | $5,877 | $(105,987) | $(303,924) | | Net (decrease)/increase in cash and cash equivalents | $(67,172) | $7,711 | $(11,994) | | Cash and cash equivalents, end of period | $53,556 | $120,728 | $113,017 | - Cash provided by operating activities decreased by $121.1 million (87.9%) in fiscal 2023[259][260] - Cash used in investing activities increased by $65.7 million (272.3%) in fiscal 2023, driven by $89.6 million in capital expenditures, including $73.2 million for the Relocation[259][263] - Cash provided by financing activities in fiscal 2023 was $5.9 million, primarily from $25.0 million in borrowings, offsetting dividend distributions[259][265] Notes to Consolidated Financial Statements The notes provide detailed information on the company's organization, significant accounting policies, discontinued operations, leases, debt, net sales, advertising, property, inventory, accrued expenses, fair value measurements, self-insurance, stockholders' equity, benefit plans, income taxes, commitments, contingencies, and restructuring. Key updates include details on the Maryville relocation, changes in lease agreements, and ongoing litigation 1. Organization 2. Significant Accounting Policies 3. Discontinued Operations 4. Leases 5. Notes, Loans Payable, and Financing Arrangements 6. Net Sales 7. Advertising Costs 8. Property, Plant, and Equipment 9. Inventories 10. Accrued Expenses and Deferred Revenue 11. Fair Value Measurement 12. Self-Insurance Reserves 13. Stockholders' Equity 14. Employer Sponsored Benefit Plans 15. Income Taxes 16. Commitments and Contingencies 17. Restructuring