Smith & Wesson Brands(SWBI) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Smith & Wesson Brands, Inc. for the three months ended July 31, 2023 and 2022, including balance sheets, income statements, equity changes, cash flows, and detailed notes on accounting policies, leases, debt, fair value, inventory, accrued expenses, equity, commitments, and restructuring Condensed Consolidated Balance Sheets Presents the company's financial position at July 31, 2023, and April 30, 2023, detailing assets, liabilities, and stockholders' equity | Metric | July 31, 2023 (in thousands) | April 30, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :--------------------------- | :-------------------------- | :-------------------- | :------- | | Total current assets | $264,153 | $291,920 | $(27,767) | -9.5% | | Total assets | $537,662 | $541,294 | $(3,632) | -0.7% | | Total current liabilities | $85,802 | $87,213 | $(1,411) | -1.6% | | Total liabilities | $154,947 | $156,671 | $(1,724) | -1.1% | | Total stockholders' equity | $382,715 | $384,623 | $(1,908) | -0.5% | - Inventories decreased by $6.36 million from $177.12 million on April 30, 2023, to $170.75 million on July 31, 2023[11] - Property, plant, and equipment, net, increased by $24.27 million, from $210.33 million to $234.60 million, indicating significant capital investments[11] Condensed Consolidated Statements of Income Details the company's revenues, expenses, and net income for the three months ended July 31, 2023, and 2022 | Metric | Three Months Ended July 31, 2023 (in thousands) | Three Months Ended July 31, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | :------- | | Net sales | $114,243 | $84,394 | $29,849 | 35.4% | | Cost of sales | $83,842 | $52,923 | $30,919 | 58.4% | | Gross profit | $30,401 | $31,471 | $(1,070) | -3.4% | | Total operating expenses | $26,052 | $27,554 | $(1,502) | -5.5% | | Operating income | $4,349 | $3,917 | $432 | 11.0% | | Net income | $3,118 | $3,312 | $(194) | -5.9% | | Basic - net income per share | $0.07 | $0.07 | $0.00 | 0.0% | | Diluted - net income per share | $0.07 | $0.07 | $0.00 | 0.0% | Condensed Consolidated Statements of Changes in Stockholders' Equity Outlines changes in stockholders' equity, including stock-based compensation, dividends, and net income, for the three months ended July 31, 2023 | Metric | Balance at April 30, 2023 (in thousands) | Stock-based compensation (in thousands) | Dividends issued (in thousands) | Net income (in thousands) | Balance at July 31, 2023 (in thousands) | | :----------------------- | :------------------------------------- | :-------------------------------------- | :------------------------------ | :------------------------ | :------------------------------------ | | Additional Paid-In Capital | $283,666 | $1,276 | — | — | $284,176 | | Retained Earnings | $523,184 | — | $(5,536) | $3,118 | $520,766 | | Total Stockholders' Equity | $384,623 | $1,276 | $(5,536) | $3,118 | $382,715 | - Stock-based compensation contributed $1.276 million to additional paid-in capital for the three months ended July 31, 2023[15] - Dividends issued amounted to $5.536 million, leading to a decrease in retained earnings[15] Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities for the three months ended July 31, 2023, and 2022 | Cash Flow Activity | Three Months Ended July 31, 2023 (in thousands) | Three Months Ended July 31, 2022 (in thousands) | Change (in thousands) | % Change | | :----------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | :------- | | Operating activities | $40,630 | $7,145 | $33,485 | 468.7% | | Investing activities | $(32,067) | $(11,586) | $(20,481) | -176.8% | | Financing activities | $(6,640) | $(5,835) | $(805) | -13.8% | | Net increase/(decrease) in cash and cash equivalents | $1,923 | $(10,276) | $12,199 | -118.7% | | Cash and cash equivalents, end of period | $55,479 | $110,452 | $(54,973) | -49.8% | - Cash provided by operating activities significantly increased by $33.485 million, primarily due to a decrease in inventories and an increase in accounts receivable[18][86] - Cash used in investing activities increased by $20.481 million, largely driven by payments to acquire property and equipment, including significant expenditures for the Maryville Relocation[18][87] Notes to Condensed Consolidated Financial Statements (Unaudited) Provides detailed explanations and disclosures supporting the condensed consolidated financial statements (1) Organization Describes the company's business, products, and the ongoing relocation of its headquarters and manufacturing operations - Smith & Wesson Brands, Inc. is a leading manufacturer and designer of firearms, including handguns, long guns, handcuffs, and suppressors, sold under brands like Smith & Wesson, M&P, and Gemtech[21] - The company began moving inventory into its new Maryville, Tennessee facility and commenced distribution activities from there in August 2023, as part of a plan to relocate its headquarters and certain manufacturing operations[21] (2) Basis of Presentation Explains the accounting principles and assumptions used in preparing the unaudited interim financial statements - The interim financial statements are unaudited and include only normal recurring adjustments necessary for fair presentation, prepared in accordance with GAAP but with condensed disclosures[22][23] - Results for the three months ended July 31, 2023, may not be indicative of the full fiscal year ending April 30, 2024[23] (3) Leases Details the company's operating and finance lease obligations, including right-of-use assets and liabilities | Lease Type | Right-of-use assets, net (in thousands) | Total lease liabilities (in thousands) | Weighted average lease term (years) | Weighted average discount rate (%) | | :----------- | :------------------------------------ | :----------------------------------- | :---------------------------------- | :------------------------------- | | Operating | $1,518 | $1,733 | 2.8 | 4.4% | | Finance | $31,617 | $38,057 | 15.1 | 5.0% | - The company recorded $0.386 million in operating lease costs and $0.566 million in finance lease amortization for the three months ended July 31, 2023[28] - The Missouri Sublease, where American Outdoor Brands, Inc. (AOUT) subleases 64.7% of the distribution center, is intended to be terminated around January 1, 2024, with AOUT assuming the Missouri Lease[29] (4) Notes, Loans Payable, and Financing Arrangements Outlines the company's debt instruments, revolving line of credit, and related financial covenants - The company has an unsecured revolving line of credit of $100.0 million, maturing on August 24, 2025, with an option to increase by $50.0 million[32] - As of July 31, 2023, $25.0 million was outstanding on the Revolving Line, bearing interest at 6.82% (SOFR rate plus applicable margin)[33] - The credit agreement was amended on April 28, 2023, to replace LIBOR with SOFR and adjust the definition of 'Consolidated Fixed Charge Coverage Ratio' to exclude unfinanced capital expenditures related to the Relocation[32] (5) Fair Value Measurement Discusses the methodology for measuring financial assets and liabilities at fair value using a three-level hierarchy - The company measures financial assets and liabilities using the fair value hierarchy (Level 1, 2, 3)[36] - Cash and cash equivalents, totaling $55.5 million as of July 31, 2023, are measured at fair value using Level 1 inputs (unadjusted quoted prices in active markets)[38] - There were no Level 2 or Level 3 financial assets or liabilities as of July 31, 2023[40] (6) Inventories Provides a breakdown of inventory categories and their values at different reporting dates | Inventory Category | July 31, 2023 (in thousands) | April 30, 2023 (in thousands) | | :----------------- | :--------------------------- | :---------------------------- | | Finished goods | $99,075 | $93,705 | | Finished parts | $53,839 | $65,460 | | Work in process | $5,162 | $6,821 | | Raw material | $12,678 | $11,132 | | Total inventories | $170,754 | $177,118 | - Total inventories decreased by $6.364 million from April 30, 2023, to July 31, 2023, primarily driven by a reduction in finished parts and work in process[41] (7) Accrued Expenses and Deferred Revenue Details the composition and changes in accrued expenses and deferred revenue | Accrued Expense Category | July 31, 2023 (in thousands) | April 30, 2023 (in thousands) | | :----------------------- | :--------------------------- | :---------------------------- | | Accrued employee benefits | $3,263 | $3,256 | | Accrued taxes other than income | $2,844 | $3,703 | | Accrued other | $2,643 | $4,597 | | Accrued professional fees | $1,989 | $2,596 | | Accrued distributor incentives | $1,762 | $1,640 | | Current portion of finance lease obligation | $1,466 | $1,434 | | Accrued rebates and promotions | $1,078 | $1,649 | | Current portion of operating lease obligation | $996 | $1,274 | | Total accrued expenses and deferred revenue | $16,041 | $20,149 | - Total accrued expenses and deferred revenue decreased by $4.108 million, from $20.149 million to $16.041 million, primarily due to decreases in 'Accrued other' and 'Accrued taxes other than income'[42] (8) Stockholders' Equity Presents information on basic and diluted earnings per share, stock-based compensation, and unrecognized compensation expense | Metric | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Basic EPS | $0.07 | $0.07 | | Diluted EPS | $0.07 | $0.07 | | Weighted average common shares outstanding (Basic) | 46.103 million | 45.739 million | | Weighted average common shares outstanding (Diluted) | 46.551 million | 46.102 million | - Total stock-based compensation expense was $1.3 million for the three months ended July 31, 2023, up from $1.2 million in the prior year[46] - As of July 31, 2023, there was $6.4 million of unrecognized compensation expense related to unvested RSUs and PSUs, expected to be recognized over a weighted average remaining contractual term of 1.9 years[52] (9) Commitments and Contingencies Discusses significant legal proceedings, product liability cases, and the capital expenditure plans for the Maryville relocation - The company is involved in several lawsuits, including a breach of contract claim by Gemini Technologies ($18.6 million sought), product liability cases, a putative class action in Canada (CAD$150 million sought), and lawsuits related to mass shootings (Chabad of Poway, Highland Park, Mexican Government, City of Buffalo/Rochester)[53][54][55][56][58][59][60] - Management believes the allegations in these lawsuits are unfounded and intends to aggressively defend them, stating that any incidents were due to negligence or misuse of firearms by third parties[53][61] - The company plans to relocate its headquarters and significant operations to Maryville, Tennessee, with expected capital expenditures of $160.0 million to $170.0 million through fiscal 2024, including a guaranteed maximum price of $114.5 million for construction[68][69] (10) Restructuring Details the restructuring charges incurred, primarily related to the Maryville relocation, and the associated accruals | Restructuring Charge Category | Three Months Ended July 31, 2023 (in thousands) | Three Months Ended July 31, 2022 (in thousands) | | :---------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Cost of sales | $903 | $1,243 | | Selling, marketing, and distribution | $2,195 | $366 | | General and administrative | $814 | $608 | | Total restructuring charges | $3,912 | $2,220 | - Restructuring charges increased to $3.9 million for the three months ended July 31, 2023, from $2.2 million in the prior year, primarily due to increased office rent and equipment costs related to the Relocation[72] - The restructuring accrual at July 31, 2023, was $11.874 million, with $10.817 million for severance and employee-related benefits and $1.057 million for relocation[72] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the company's financial performance for the first quarter of fiscal 2024, highlighting key operational results, liquidity, and capital resources, with a focus on the Maryville relocation Overview Refers to the Fiscal 2023 Annual Report for key objectives and performance indicators - The overview refers to the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Fiscal 2023 Annual Report for key objectives and performance indicators[74] First Quarter Fiscal 2024 Highlights Summarizes key financial metrics and performance for the first quarter of fiscal year 2024 | Metric | Q1 Fiscal 2024 (July 31, 2023) | Q1 Fiscal 2023 (July 31, 2022) | Change | % Change | | :-------------------- | :----------------------------- | :----------------------------- | :----- | :------- | | Net sales | $114.2 million | $84.4 million | $29.8 million | 35.4% | | Gross margin | 26.6% | 37.3% | -10.7% | -28.7% | | Net income | $3.1 million | $3.3 million | $(0.2) million | -6.1% | | Diluted EPS | $0.07 | $0.07 | $0.00 | 0.0% | Results of Operations Analyzes the company's financial performance, including net sales, gross profit, operating expenses, and net income Net Sales and Gross Profit Examines revenue trends by product category and factors influencing gross margin changes | Product Category | Q1 Fiscal 2024 Net Sales (in thousands) | Q1 Fiscal 2023 Net Sales (in thousands) | $ Change (in thousands) | % Change | | :----------------- | :------------------------------------ | :------------------------------------ | :---------------------- | :------- | | Handguns | $86,106 | $59,367 | $26,739 | 45.0% | | Long Guns | $18,782 | $14,105 | $4,677 | 33.2% | | Other Products & Services | $9,355 | $10,922 | $(1,567) | -14.3% | | Total net sales | $114,243 | $84,394 | $29,849 | 35.4% | | Gross profit | $30,401 | $31,471 | $(1,070) | -3.4% | | Gross margin | 26.6% | 37.3% | -10.7% | -28.7% | - Handgun sales increased by 45.0% due to increased revolver shipments, new product introductions (29.9% of handgun sales), and a 5% price increase on select products[75] - Gross margin decreased from 37.3% to 26.6% primarily due to unfavorable fixed-cost absorption from lower production volume, inflation on raw materials and labor, and unfavorable inventory reserve adjustments, partially offset by price increases[78] Operating Expenses Details changes in research and development, selling, marketing, distribution, and general and administrative expenses | Expense Category | Q1 Fiscal 2024 (in thousands) | Q1 Fiscal 2023 (in thousands) | $ Change (in thousands) | % Change | | :----------------------- | :---------------------------- | :---------------------------- | :---------------------- | :------- | | Research and development | $1,799 | $1,673 | $126 | 7.5% | | Selling, marketing, and distribution | $10,040 | $8,027 | $2,013 | 25.1% | | General and administrative | $14,213 | $17,854 | $(3,641) | -20.4% | | Total operating expenses | $26,052 | $27,554 | $(1,502) | -5.5% | - Selling, marketing, and distribution expenses increased by $2.0 million, mainly due to a $2.0 million impairment on distribution equipment related to the Relocation[80] - General and administrative expenses decreased by $3.6 million, primarily due to a $2.7 million decrease in profit sharing expense and reduced legal-related expenses, partially offset by increased compensation[80] Operating Income Analyzes the drivers behind the company's operating income and operating margin performance | Metric | Q1 Fiscal 2024 (in thousands) | Q1 Fiscal 2023 (in thousands) | $ Change (in thousands) | % Change | | :--------------- | :---------------------------- | :---------------------------- | :---------------------- | :------- | | Operating income | $4,349 | $3,917 | $432 | 11.0% | | Operating margin | 3.8% | 4.6% | -0.8% | -17.4% | - Operating income increased by $0.432 million, driven by increased sales volumes, decreased profit sharing, and lower legal expenses, despite unfavorable fixed cost absorption and inventory reserve adjustments[82] Income Taxes Discusses the company's income tax expense and effective tax rate for the reporting period | Metric | Q1 Fiscal 2024 (in thousands) | Q1 Fiscal 2023 (in thousands) | $ Change (in thousands) | % Change | | :-------------------- | :---------------------------- | :---------------------------- | :---------------------- | :------- | | Income tax expense | $1,431 | $845 | $586 | 69.3% | | Effective tax rate | 31.5% | 20.3% | 11.2% | 55.2% | - The increase in income tax expense was a result of higher operating income[83] - Excluding discrete stock compensation items, the effective tax rate would have been 24.7% for Q1 Fiscal 2024, compared to 23.6% for Q1 Fiscal 2023[83] Net Income Presents the company's net income and earnings per share for the quarter | Metric | Q1 Fiscal 2024 (in thousands) | Q1 Fiscal 2023 (in thousands) | $ Change (in thousands) | % Change | | :--------------- | :---------------------------- | :---------------------------- | :---------------------- | :------- | | Net income | $3,118 | $3,312 | $(194) | -5.9% | | Basic EPS | $0.07 | $0.07 | $0.00 | 0.0% | | Diluted EPS | $0.07 | $0.07 | $0.00 | 0.0% | - Net income for the three months ended July 31, 2023, was slightly lower than the comparable quarter last year, resulting in flat basic and diluted EPS[84] Liquidity and Capital Resources Assesses the company's ability to generate and manage cash, including operating, investing, and financing activities, debt, and future capital needs Operating Activities Analyzes cash flows generated from the company's primary business operations | Metric | Q1 Fiscal 2024 (in thousands) | Q1 Fiscal 2023 (in thousands) | $ Change (in thousands) | % Change | | :----------------------- | :---------------------------- | :---------------------------- | :---------------------- | :------- | | Cash provided by operating activities | $40,630 | $7,145 | $33,485 | 468.7% | - Cash provided by operating activities significantly increased, positively impacted by a $52.2 million incremental decrease in inventory and a $11.9 million incremental increase in accounts receivable[86] Investing Activities Examines cash flows related to the acquisition and disposal of long-term assets, particularly capital expenditures for the Maryville Relocation | Metric | Q1 Fiscal 2024 (in thousands) | Q1 Fiscal 2023 (in thousands) | $ Change (in thousands) | % Change | | :----------------------- | :---------------------------- | :---------------------------- | :---------------------- | :------- | | Cash used in investing activities | $(32,067) | $(11,586) | $(20,481) | -176.8% | - Capital expenditures for the three months ended July 31, 2023, totaled $32.1 million, with $30.4 million specifically related to the Maryville Relocation[87] - The company expects to spend between $70.0 million and $75.0 million on capital expenditures for the Relocation in fiscal 2024, with $50.0 million to $55.0 million allocated to facility construction[88] Financing Activities Details cash flows from debt, equity, and dividend transactions | Metric | Q1 Fiscal 2024 (in thousands) | Q1 Fiscal 2023 (in thousands) | $ Change (in thousands) | % Change | | :----------------------- | :---------------------------- | :---------------------------- | :---------------------- | :------- | | Cash used in financing activities | $(6,640) | $(5,835) | $(805) | -13.8% | - The primary use of cash in financing activities was a $5.5 million dividend distribution in Q1 Fiscal 2024, an increase from $4.6 million in the prior year[89] Finance Lease Describes the company's material finance lease for its Missouri distribution center - The company has a material finance lease for its Missouri distribution center, valued at $46.2 million with an effective interest rate of approximately 5.0%, payable through fiscal 2039[90] - Income related to the Missouri Sublease was $0.581 million for the quarter, with $0.289 million recorded in general and administrative expenses and $0.292 million in interest income[90] Credit Facilities Outlines the company's revolving line of credit and compliance with financial covenants - The company maintains an unsecured revolving line of credit of up to $100.0 million, with $25.0 million outstanding at a 6.82% interest rate as of July 31, 2023[91][92] - The credit agreement includes financial covenants for maximum leverage and minimum debt service coverage, with the company in compliance as of July 31, 2023[92] Dividends Reports on the company's dividend policy and recent dividend declarations - The Board of Directors authorized a regular quarterly dividend of $0.12 per share in June 2023, payable on October 5, 2023, to stockholders of record as of September 21, 2023[93] Future Capital Requirements Discusses factors influencing future capital needs and the adequacy of existing resources - Future capital requirements depend on factors such as net sales, product development, sales and marketing expansion, new product introductions, manufacturing capacity costs, and the Maryville Relocation[94] - The company believes its existing capital resources and credit facilities are adequate to fund operations, finance leases, and other commitments for the next 12 months[95] Other Matters Covers additional financial reporting topics, including critical accounting policies and recent accounting pronouncements Critical Accounting Policies Refers to the significant accounting policies and estimates used in financial statement preparation - The preparation of financial statements requires estimates and assumptions; significant accounting policies are disclosed in Note 2 of the Fiscal 2023 Annual Report, with no material changes[96] Recent Accounting Pronouncements Discusses the nature and impact of newly adopted accounting standards - The nature and impact of recent accounting pronouncements are discussed in Note 2—Basis of Presentation to the condensed consolidated financial statements[97] Item 3. Quantitative and Qualitative Disclosures About Market Risk During the period ended July 31, 2023, the company did not engage in any forward option contracts or have any outstanding forward contracts, indicating minimal exposure to certain market risks - The company did not enter into or transact any forward option contracts or have any forward contracts outstanding during the period ended July 31, 2023[98] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of July 31, 2023, with no material changes to internal control over financial reporting during the quarter - As of July 31, 2023, the company's disclosure controls and procedures were deemed effective by the Chief Executive Officer and Chief Financial Officer[99] - There were no material changes to the internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q[100] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 9—Commitments and Contingencies for a detailed discussion of the nature of legal proceedings against the company - The nature of legal proceedings against the company is discussed in Note 9—Commitments and Contingencies[103] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds As of July 31, 2023, the company had no authorized share repurchase programs - As of July 31, 2023, the company had no authorized share repurchase programs[104] Item 5. Other Information This section details the adoption of Rule 10b5-1 Trading Plans by Section 16 officers and directors, specifically noting a plan adopted by a director for the potential sale of common stock Rule 10b5-1 Trading Plans Describes the adoption of Rule 10b5-1 trading plans by company directors and officers - Director Robert L. Scott adopted a Rule 10b5-1 Plan on June 28, 2023, for the potential sale of up to 12,000 shares of common stock, expiring on March 29, 2024[105] - No other directors or officers adopted or terminated a 'non-Rule 10b5-1 trading arrangement' during the three months ended July 31, 2023[106] Item 6. Exhibits This section lists the exhibits included with or incorporated by reference into the Quarterly Report on Form 10-Q, including bylaws, certifications, and XBRL documents - The report includes various exhibits such as Amended and Restated Bylaws, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and Inline XBRL documents[107][111] Signatures The report is duly signed on behalf of Smith & Wesson Brands, Inc. by its President and Chief Executive Officer, Mark P. Smith, and Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary, Deana L. McPherson, on September 7, 2023 - The report was signed by Mark P. Smith, President and Chief Executive Officer, and Deana L. McPherson, Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary, on September 7, 2023[113]