Business context and reporting period
Smith & Wesson Brands, Inc. designs and manufactures firearms and related products, including handguns, long guns and suppressors, and provides manufacturing services. This Form 10-Q covers the fiscal second quarter and six months ended October 31, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars unless noted.
The company began manufacturing and distribution activities at its new Maryville, Tennessee facility during the quarter as part of its relocation.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2023 | Six months ended Oct. 31, 2023 |
|---|---|---|
| Net sales | $125.0 million; up 3.2% | $239.2 million; up 16.4% |
| Gross profit / margin | $31.8 million / 25.4% (32.4% prior year) | $62.2 million / 26.0% (34.4% prior year) |
| Operating income / margin | $3.8 million / 3.0% (down 69.9%) | $8.1 million / 3.4% (down 50.6%) |
| Net income / diluted EPS | $2.5 million / $0.05 (prior year $9.6 million / $0.21) | $5.6 million / $0.12 (prior year $13.0 million / $0.28) |
- Quarterly sales growth reflected long guns (+65.4%), partly offset by lower handgun sales (-5.0%) and other products and services (-22.8%). Long guns rose 50.8% and handguns 14.5% for the six-month period; other products and services fell 18.6%.
- For the six months, operating cash flow was $37.8 million, versus $28.2 million used in the prior-year period. Investing activities used $67.1 million, including $67.0 million of property and equipment purchases. Financing activities provided $19.9 million. Cash declined $9.4 million to $44.2 million.
- At October 31, cash was $44.2 million; notes and loans payable were $64.8 million, including $65.0 million drawn on the revolving credit line at an average 7.17% rate. Finance lease liabilities totaled $37.7 million. The company was compliant with its financial covenants.
- Current assets were $281.8 million and current liabilities $90.9 million. Inventory was $163.3 million, down $13.8 million from April 30.
- Six-month dividends distributed were $11.1 million; the company repurchased 645,770 shares for $8.2 million under a new $50 million authorization.
Material changes versus the prior comparable periods
- Sales increased, but profitability declined sharply: quarterly net income fell 74.1%, and six-month net income fell 56.7%. Gross margin contracted by 7.0 percentage points for the quarter and 8.4 points for the six months.
- Management attributed margin pressure principally to lower production and unfavorable fixed-cost absorption, inflation in materials and labor, unfavorable inventory reserve adjustments, and a $3.2 million accrued legal settlement. Higher sales and new products partly offset these impacts.
- Six-month capital spending rose to $67.0 million from $39.4 million. The company received $50 million of revolving-line borrowings and repaid $10 million, resulting in $65 million outstanding at period-end.
- Relocation-related restructuring charges were $6.0 million for the six months, compared with $5.3 million in the prior year. The company also recorded a $1.9 million impairment of Missouri distribution equipment.
Outlook, commentary, risks and contingencies
- Management expects inventory to decline by fiscal year-end as the Tennessee transition advances and production is aligned with channel inventory and consumer demand. It cautions that excess company or distributor inventory could hurt future results and that demand is difficult to forecast.
- Fiscal 2024 capital expenditure expectations are $70–$75 million, including $50–$55 million for facility construction; excluding relocation payments, expected spending is $20–$25 million. Total relocation spending, including machinery and equipment, is expected to reach $160–$170 million through fiscal year-end.
- Under the Tennessee project agreement, the company committed to at least $120 million of aggregate capital expenditures by December 31, 2025, at least 620 new jobs, and an average hourly wage of at least $25.97. It may owe payments if specified commitments are not met.
- Management believes existing capital resources and credit facilities will fund operations, leases and other commitments for the next 12 months, but says future financing may not be available on acceptable terms. The revolving facility matures August 24, 2025, subject to the agreement’s earlier-maturity provision.
- Litigation includes product-liability matters, the City of Gary case, claims related to several shootings, and other actions. The company says it cannot estimate a reasonably possible range of additional losses for material adverse judgments and has not accrued for such judgments; it believes defense-cost accruals are adequate. A proposed employee wage-class settlement remained subject to formal agreement and court approval. The Gemini matter had a November 22, 2023 settlement concerning indemnity and counterclaims; remaining claims were to be defended.
- Key risks identified include firearm demand and consumer spending, regulation, litigation, raw-material availability and cost, competition, and execution of the relocation. The filing gives no specific sales or earnings forecast.
Important facts for investors to verify
- Whether sales growth, particularly in long guns and newly introduced products, persists amid the reported decline in consumer demand indicators.
- Whether gross margins recover as production and fixed-cost absorption improve, and how legal, inflationary and inventory-reserve costs evolve.
- Progress, remaining costs and potential disruption from the Tennessee relocation, including compliance with project spending, hiring and wage commitments.
- Inventory levels in both company operations and distribution channels, and the effect of any excess supply on orders and pricing.
- Revolving-credit usage, borrowing costs, covenant headroom and cash needs given relocation investment, dividends and repurchases.
- Developments in significant litigation and settlements, including any material change to estimated exposure or accruals.