Smith & Wesson Brands, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended January 31, 2022; comparisons are to the corresponding fiscal 2021 periods. Unless noted, amounts are in U.S. dollars.
Business context
The company designs and manufactures firearms and related products, including handguns, long guns, suppressors and component parts. Its outdoor products and accessories business was spun off in August 2020 and is reported as discontinued operations. The company continues to evaluate the planned divestiture of its Thompson/Center Arms brand.
Financial performance
| Metric | Three months ended Jan. 31, 2022 | Year-over-year change | Nine months ended Jan. 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $177.7 million | Down 31.0% | $682.8 million | Down 7.3% |
| Gross profit / margin | $70.4 million / 39.6% | Margin down 3.0 percentage points | $302.3 million / 44.3% | Margin up 3.1 percentage points |
| Operating income / margin | $39.7 million / 22.3% | Down 50.6%; margin down 8.9 points | $205.0 million / 30.0% | Up 0.7%; margin up 2.4 points |
| Income from continuing operations | $30.5 million | Down 50.9% | $158.4 million | Up 2.4% |
| Diluted EPS from continuing operations | $0.65 | Versus $1.12 | $3.28 | Versus $2.75 |
Quarterly sales fell in handguns (down 27.4%) and long guns (down 52.2%); other products and services increased 18.6%. For the nine-month period, handgun sales declined 4.1%, long-gun sales declined 17.7%, and other products and services increased 4.3%. Prior-year nine-month net income included $8.3 million from discontinued operations; the current period had none.
Cash flow, balance sheet and capital allocation
- Cash and liquidity: Cash was $107.3 million at January 31, 2022, versus $113.0 million at April 30, 2021. Current assets were $300.7 million and current liabilities $93.0 million.
- Cash flows, nine months: Operating cash flow was $112.3 million, down from $198.4 million. Investing activities used $15.2 million, including $15.1 million of property and equipment purchases. Financing activities used $102.8 million. Cash declined $5.7 million.
- Debt and leases: No revolving-credit borrowings or other outstanding indebtedness were reported; the company had a $100 million revolving facility and was compliant with its covenants. Finance lease liabilities totaled $39.1 million, primarily related to the Missouri distribution facility.
- Working capital: Inventory rose to $134.3 million from $78.5 million at April 30, 2021. Management attributed the increase to rebuilding stocks and reducing supply-chain risk.
- Capital returns: The company repurchased 4.76 million shares for $90 million during the nine months and paid $11.4 million in dividends. A quarterly dividend of $0.08 per share was scheduled for March 31, 2022.
Changes, outlook and management commentary
- Management attributed lower quarterly sales to easing firearm demand after unusually strong prior-year demand, lower shipments, normalized channel inventories and greater competitor availability. It said short-term market share likely declined from peak surge levels, while asserting that the company had gained share versus pre-surge levels.
- Quarterly gross margin weakened due to lower volumes, unfavorable fixed-cost absorption, and relocation-related severance and costs; price increases partly offset these pressures. Nine-month margin improved on pricing, favorable fixed-cost absorption, product mix and lower promotional spending.
- Management expects inventories to continue rising toward more normalized stocking levels and cautioned that excess company or distributor inventory could weigh on future results. No specific revenue or earnings guidance was provided.
- The planned move of headquarters and significant operations to Maryville, Tennessee is targeted for 2023. The project agreement calls for 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. Fiscal 2022 capital spending was expected to total $20–$25 million, including $10–$15 million for the facility; $629,000 of relocation capital expenditures had been incurred through January 31. Relocation-related restructuring charges through that date were $8.5 million.
- Management said existing cash and credit resources should fund operations and commitments for the next 12 months. Risks include relocation cost, timing, staffing and execution; demand and channel inventory; supply and input costs; regulation; and litigation.
Contingencies and unusual items
The filing describes multiple product-liability, consumer, and other lawsuits, including claims related to the Gemtech acquisition, shootings, and an action brought by the Mexican Government. The company disputes the claims. It states that it cannot estimate a range of reasonably possible additional losses from material adverse judgments and has not accrued for such judgments; defense-cost accruals and expected insurance reimbursements are recorded. The company also disclosed the planned Thompson/Center Arms divestiture and relocation-related costs.
Most important facts for investors to verify
- Whether firearm demand, shipment volumes and market share stabilize as channel inventories normalize.
- Whether inventory growth converts to sales without discounting or margin pressure.
- Relocation spending, schedule, staffing commitments and potential effects on production and operations.
- Progress and potential financial impact of the Thompson/Center Arms divestiture.
- Developments in litigation and any changes to loss estimates, insurance recoveries or accruals.
- Cash generation and capital returns alongside relocation investment; the filing reports no specific earnings or sales outlook.