Business context and reporting period
Smith & Wesson Brands, Inc. reported unaudited results for the three months ended July 31, 2020 (fiscal 2021 first quarter), compared with the three months ended July 31, 2019. Before its subsequent separation, the company reported Firearm and Outdoor Products & Accessories segments. The spin-off of the outdoor business was completed August 24, 2020; the company retained no ownership interest, and expects to report the outdoor business as discontinued operations beginning in the second quarter of fiscal 2021.
Key financial results
Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
- Revenue: $278.0 million, up 124.8% from $123.7 million. Firearm segment revenue was $229.9 million, up 140.9%; Outdoor Products & Accessories revenue was $50.6 million, up 52.3%.
- Profit and margins: Gross profit was $116.8 million, with a 42.0% gross margin versus $47.9 million and 38.7% a year earlier. Operating income was $65.5 million versus $1.1 million; operating margin was 23.5% versus 0.9%. Net income was $48.4 million, or $0.86 diluted EPS, versus a $2.1 million net loss, or $0.04 loss per diluted share. The effective tax rate was 24.7%.
- Segment margins: Firearm gross margin was 40.2% versus 37.1%; Outdoor Products & Accessories gross margin was 45.6% versus 42.4%.
- Cash flow: Operating activities provided $83.5 million, compared with $29.1 million used a year earlier. Investing activities used $7.6 million, including $7.3 million of property and equipment purchases. Financing activities used $136.0 million, principally reflecting $135.0 million of debt repayments. Cash decreased $60.1 million to $65.3 million.
- Liquidity and debt: Current assets were $327.9 million and current liabilities $145.3 million at July 31. Notes and loans payable, net of current portion, were $24.3 million; the company disclosed $25.0 million outstanding on its revolving credit line at July 31. Finance lease liabilities totaled $40.6 million. Total liabilities were $221.1 million, down from $341.8 million at April 30.
Material changes and management commentary
Management attributed the sharp sales increase primarily to stronger consumer demand for firearms, including heightened interest in personal protection and the upcoming election, and increased outdoor-products demand and e-commerce sales. Firearm handgun and long-gun revenue rose 136.9% and 224.4%, respectively. Management cited channel inventory drawdown and production capacity constraints that limited the company’s ability to match the increase in handgun background checks. Improved margins reflected lower firearm promotions, favorable fixed-cost absorption, pricing, and favorable product and channel mix; higher manufacturing spending, inventory valuation adjustments, and tariffs partly offset these benefits.
Operating expenses rose 9.9% to $51.3 million, including $3.6 million of separation-related costs and higher profit-sharing expense; lower travel, advertising, and employee medical costs partly offset increases. Interest expense fell 49.9% to $1.3 million, primarily due to lower credit-line borrowings. The company spent $25.0 million from cash on the outdoor-business separation at completion. It forecast fiscal 2021 capital expenditures of $30–$35 million, compared with $13.9 million in fiscal 2020, and expected firearm inventory to remain relatively flat in the next quarter. Management said existing capital resources and credit facilities should fund operations and commitments for the next 12 months.
Outlook, risks, contingencies, and unusual items
- Management warned that renewed or prolonged COVID-19 disruptions—including effects on manufacturing, employment, travel, or imports from China—could affect future sales and profitability. Demand strength may also be affected by changing consumer conditions; results for this quarter may not indicate full-year results.
- On August 24, 2020, the company amended and restated its credit agreement, providing a $100 million revolving line, with a potential increase of up to $50 million subject to conditions. The facility includes financial and other covenants; the company reported compliance at July 31. The new agreement is currently unsecured but may require liens upon specified trigger events.
- The company disclosed multiple product-liability and other lawsuits, including claims seeking substantial or unspecified damages. It stated that it could not reasonably estimate the probability or range of possible losses for material adverse judgments and had not accrued for such judgments; it believes its defense-cost accruals are adequate. An unfavorable outcome or prolonged litigation could harm the business.
- Management identified a material weakness in internal controls over goodwill-impairment accounting as of April 30, 2020, involving controls over the impairment analysis, tax treatment, and third-party work review. New controls were being designed and evaluated, but remediation had not yet been established through operating effectiveness tests. Management separately concluded disclosure controls were effective as of July 31.
- The board authorized a regular quarterly dividend of $0.05 per share, payable October 1, 2020 to holders of record September 17, 2020. The company also subleased 59% of its national logistics facility to the separated business under the master-lease terms.
Most important facts for investors to verify
- Whether unusually high firearm demand and constrained channel inventories translate into sustained orders, shipments, and margins.
- Post-spin-off financial performance, capital structure, cash contribution, shared-facility sublease, and the presentation of discontinued operations.
- Actual fiscal 2021 capital spending, liquidity, debt repayment capacity, and ongoing compliance with credit-facility covenants.
- Progress in remediating the goodwill-impairment material weakness and any updates to litigation exposure or loss estimates.
- Whether pandemic-related supply-chain, import, and tariff pressures affect future results.