Smith & Wesson Brands, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2023, ended January 31, 2023; comparisons are with the corresponding periods of fiscal 2022. The company designs and manufactures firearms and related products. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended Jan. 31, 2023 | Three months ended Jan. 31, 2022 | Nine months ended Jan. 31, 2023 | Nine months ended Jan. 31, 2022 |
|---|---|---|---|---|
| Net sales | $129.0 | $177.7 | $334.5 | $682.8 |
| Gross profit / margin | $41.8 / 32.4% | $70.4 / 39.6% | $112.6 / 33.7% | $302.3 / 44.3% |
| Operating income / margin | $14.1 / 11.0% | $39.7 / 22.3% | $30.6 / 9.1% | $205.0 / 30.0% |
| Net income | $11.1 | $30.5 | $24.0 | $158.4 |
| Diluted EPS | $0.24 | $0.65 | $0.52 | $3.28 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(21.2) | $112.3 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $64.6 | $15.1 |
Liquidity, debt and balance sheet
- At January 31, 2023, cash and cash equivalents were $44.6, down from $120.7 at April 30, 2022. Total assets were $529.2 and stockholders’ equity was $374.4.
- Current assets were $309.9 against current liabilities of $85.3. Inventory was $193.4, up $56.8 from April 30, 2022, including finished goods of $112.6.
- The company had $25.0 outstanding on its $100.0 revolving credit line at a 5.97% interest rate. It reported covenant compliance; the facility matures in August 2025, subject to the agreement’s terms. Letters of credit totaled $2.6.
- Finance lease liabilities totaled $37.9, primarily relating to the Missouri distribution center. The company stated that existing capital resources and credit facilities should fund operations and commitments for the next 12 months.
- Cash decreased $76.1 over the nine-month period. Financing activities provided $9.9, including $25.0 of revolver borrowings, while dividends used $13.7. No share repurchases occurred in the period.
Material changes versus prior periods
- Quarterly sales fell 27.4%; nine-month sales fell 51.0%. Nine-month handgun sales decreased 47.9% and long-gun sales decreased 70.5%.
- Nine-month net income declined to $24.0 from $158.4, and diluted EPS to $0.52 from $3.28. Lower sales and production volumes reduced fixed-cost absorption; inflation in raw materials, parts and labor also pressured gross margin.
- Management attributed weaker shipments to demand normalizing after pandemic-era highs, increased competitor product availability, and distributors reducing channel inventory. Sporting-goods-channel shipments materially underperformed adjusted NICS demand measures.
- Operating cash flow shifted from $112.3 generated to $21.2 used, while inventory growth and relocation-related capital spending weighed on cash. Investing cash use increased to $64.8 from $15.2.
Outlook, commentary and risks
- Tennessee relocation: The company is constructing a new facility in Maryville for its headquarters and significant operations, including distribution. It expects total construction and equipment spending of approximately $160–$170 through fiscal 2024, and fiscal 2023 capital expenditures of $95–$100, including $65–$70 for the facility. Through January 31, it had incurred $59.3 and paid $52.8 of relocation capital expenditures, net of $9.0 in incentives.
- The project agreement sets targets of at least $120.0 in aggregate capital expenditures by December 31, 2025, 620 new jobs, and an average hourly wage of at least $25.97; shortfalls may require payments to the development board. Management expects inventories to decline by fiscal year-end but remain elevated during the transition.
- Management considers overall firearm demand healthy but normalized. It noted that pricing actions are constrained by competition and that process improvements to offset inflation may resume only after the relocation is complete.
- The board authorized a regular quarterly dividend of $0.10 per share. The dividend referenced in the filing was payable March 30, 2023 to holders of record March 16, 2023.
- Litigation: The company described product-liability matters and other lawsuits, including the Gemini dispute, claims related to shootings, and a proposed employee wage class action. It says it intends to defend the claims. It could not estimate a range of reasonably possible additional losses for material adverse judgments and had not accrued for such judgments; it considers its defense-cost accruals adequate.
- Other risks include demand and distributor inventory levels, inflation, supply and component costs, firearm regulation and litigation, and execution of the relocation. The company warned that excess internal or channel inventory could hurt future results.
Important facts for investors to verify
- Whether sell-through and distributor inventory levels stabilize, and whether shipments recover relative to adjusted NICS demand.
- Whether inventory of $193.4 declines as expected and whether lower production volumes and inflation continue to pressure gross margin.
- Progress, timing and total cost of the Tennessee relocation against the stated spending, completion, hiring and wage commitments.
- Cash needs and available borrowing capacity as relocation spending continues, including the LIBOR-to-SOFR transition and borrowing-rate effects.
- Developments in significant litigation and any changes to the company’s ability to estimate or accrue potential losses.