Smith & Wesson Brands, Inc. — Form 10-Q Summary
Business context and period. Smith & Wesson designs and manufactures firearms and related products. This unaudited report covers the three months ended July 31, 2022, the first quarter of fiscal 2023, with comparison to the quarter ended July 31, 2021. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $84.4 million | $274.6 million |
| Gross profit / margin | $31.5 million / 37.3% | $129.9 million / 47.3% |
| Operating income / margin | $3.9 million / 4.6% | $99.9 million / 36.4% |
| Net income | $3.3 million | $76.9 million |
| Diluted EPS | $0.07 | $1.57 |
| Cash provided by operating activities | $7.1 million | $109.1 million |
| Capital expenditures paid | $11.5 million | $5.8 million |
- Sales declined 69.3%. Handgun sales fell 70.0% to $59.4 million and long-gun sales fell 79.2% to $14.1 million; other products and services rose 20.5% to $10.9 million.
- Gross margin fell 10.0 percentage points. Management cited lower sales and production volumes, weaker fixed-cost absorption, and relocation-related costs, partly offset by lower compensation costs and favorable inventory valuation adjustments.
- Cash and cash equivalents were $110.5 million at July 31, 2022, versus $120.7 million at April 30. Total current assets were $326.4 million and current liabilities $115.1 million.
- Inventory increased to $182.5 million from $136.7 million at April 30, including finished goods rising to $106.6 million from $58.5 million. Accounts receivable declined to $23.8 million from $62.7 million.
- The company reported no borrowings on its $100 million revolving credit facility and was compliant with its financial covenants. It had $2.6 million of outstanding letters of credit. Finance lease liabilities totaled $38.5 million; the filing reports no outstanding credit-facility indebtedness.
- Operating cash flow was substantially lower year over year, reflecting reduced earnings and working-capital effects, including inventory investment. Cash used in investing was $11.6 million; cash used in financing was $5.8 million, primarily dividends. Cash declined $10.3 million during the quarter.
Material changes and management commentary
- Management attributed the sharp sales decline mainly to demand normalizing after pandemic-era demand and to channel inventory changes. Sporting-goods-channel shipments fell 75.5% for handguns and 80.9% for long guns, while adjusted NICS indicators of overall consumer demand fell 4.9% and 4.5%, respectively.
- Management said the company may have temporarily lost market share after its strong prior-period gains, but expects the product pull-forward to correct as channel inventories normalize and new products launch. New products represented 21.3% of sales.
- Management expects inventory to increase slightly in the short term and decline by fiscal year-end with normal seasonality. It cautioned that inventory exceeding demand, both internally and in the distribution channel, could hurt future results.
- The company recorded $2.2 million of relocation-related restructuring charges, including $1.9 million for severance and employee-related benefits. The severance amounts had not been paid at quarter-end.
Outlook, commitments and risks
- The company plans to move its headquarters and significant operations to Maryville, Tennessee, with the relocation targeted for 2023. Under its project agreement, it intends to invest at least $120 million by December 31, 2025, create at least 620 jobs, and meet specified wage commitments. It expects fiscal 2023 capital expenditures of $125 million to $130 million, including $90 million to $95 million for facility construction; this compares with $11.5 million of capital expenditures paid during the quarter. Through July 31, it had incurred $29.1 million and paid $7.6 million for relocation capital expenditures.
- Excluding relocation spending, management expects fiscal 2023 capital expenditures of $20 million to $25 million. It believes cash and available credit will fund operations, leases, and commitments for the next 12 months, while noting that future financing may not be available on acceptable terms.
- A $0.10-per-share quarterly dividend was authorized, payable October 6, 2022 to holders of record September 22, 2022. No shares were repurchased in the quarter, and no repurchase authorization remained unfulfilled.
- Material litigation includes a Gemini dispute seeking $18.6 million, product-liability matters, the Mexican Government’s lawsuit, and a proposed employee wage class action. The filing states that the company cannot reasonably estimate a range of possible additional losses for material adverse litigation outcomes and has not accrued for such judgments; it believes its defense-cost accruals are adequate. An unfavorable outcome or prolonged litigation could harm the business.
- Other disclosed risks include firearms regulation and litigation, demand and consumer behavior, inflation and consumer spending, supply and input costs, competition, product launches, and execution of the relocation. Management reported disclosure controls were effective as of July 31, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether channel inventories normalize as expected and whether shipment levels recover without further market-share erosion.
- Inventory quality, pace of sell-through, and the potential effect of excess inventory on margins and cash flow.
- Relocation schedule, total spending, fiscal 2023 construction outlays, and progress toward job and wage commitments.
- Developments in material litigation, insurance recoveries, and any future estimate or accrual of potential losses.
- Cash generation and liquidity as earnings decline and relocation-related capital expenditures rise.