Business context and reporting period
Smith & Wesson Brands, Inc. designs and manufactures firearms and related products. This unaudited Form 10-Q covers the second quarter and first six months of fiscal 2023, ended October 31, 2022; comparisons are with the corresponding fiscal 2022 periods. Financial amounts below are in millions except per-share data.
Financial results and liquidity
| Metric | Three months ended Oct. 31, 2022 | Six months ended Oct. 31, 2022 |
|---|---|---|
| Net sales | $121.0 | $205.4 |
| Gross profit / margin | $39.3 / 32.4% | $70.7 / 34.4% |
| Operating income / margin | $12.5 / 10.3% | $16.4 / 8.0% |
| Net income | $9.6 | $13.0 |
| Diluted EPS | $0.21 | $0.28 |
| Operating cash flow | Not presented separately for the quarter | $(28.2) |
| Capital expenditures | Not presented separately for the quarter | $39.4 |
At October 31, cash was $43.0, current assets were $302.9 and current liabilities were $93.6. The company reported no borrowings outstanding under its $100.0 revolving credit facility and stated it was compliant with financial covenants. Finance lease liabilities totaled $38.2, primarily related to the Missouri distribution facility; total liabilities were $139.4.
Material changes versus prior comparable periods
- Quarterly sales fell 47.5% year over year, gross margin declined from 44.3% to 32.4%, and net income fell from $50.9 to $9.6. For the first six months, sales declined 59.3%, gross margin fell from 45.9% to 34.4%, and net income decreased from $127.8 to $13.0.
- Quarterly handgun sales declined 40.9% and long-gun sales declined 71.8%. For the six-month period, handgun sales fell 57.1% and long-gun sales fell 75.7%. Other products and services were roughly flat over the first six months, up 1.0%.
- Management attributed lower sales chiefly to demand normalizing after pandemic-era highs and distributor inventory adjustments. It also cited competitor promotions and inflation-related consumer shifts toward lower-priced offerings. Management said adjusted NICS data indicated overall firearm demand remained healthy.
- Lower volume, inflation in materials and labor, weaker fixed-cost absorption, product-liability adjustments and inventory valuation adjustments weighed on quarterly gross margin. Six-month results also included relocation-related severance and relocation costs.
- Cash and cash equivalents declined from $120.7 at April 30, 2022 to $43.0. Six-month operating cash flow moved from $105.4 provided in the prior-year period to $28.2 used, with inventory growth and lower earnings among the drivers. Inventory rose to $196.5 from $136.7, including finished goods increasing to $119.9 from $58.5.
Outlook, commentary, risks and unusual items
- The company plans to relocate its headquarters and significant operations to Maryville, Tennessee. It expects fiscal 2023 capital expenditures of $115–$120, including $70–$75 for the new facility. Separately, it expects $20–$25 of fiscal 2023 capital expenditures excluding relocation spending. The project agreement calls for at least $120.0 of aggregate project capital expenditures by December 31, 2025 and includes employment and wage commitments; payments may be required if specified targets are missed.
- Management expects inventory to decline by fiscal year-end due to seasonality, but to remain elevated as the Tennessee transition begins. It cautioned that inventory exceeding demand could adversely affect future results and that distributor inventory effects are difficult to forecast.
- Management believes existing capital resources and credit facilities will fund operations, finance leases and other commitments for the next 12 months. It also cautioned that future equity or debt financing may not be available on acceptable terms.
- Reported restructuring charges related to the relocation were $3.1 in the quarter and $5.3 for the six months. The company recorded $39.8 of relocation-related capital expenditures and had paid $33.0 through October 31, net of $9.0 in state and local incentives received.
- Material legal matters include product-liability claims and lawsuits, the Gemini dispute seeking $18.6 in damages, and 12 actions related to the July 2022 Highland Park shooting. The Mexican government’s case was dismissed by the district court; the plaintiff appealed. The company said it cannot estimate a reasonably possible range of additional losses for material adverse litigation outcomes and has not accrued for such judgments, while stating its defense-cost accruals are adequate.
- A quarterly dividend of $0.10 per share was authorized; the filing stated a December 20, 2022 record date and January 3, 2023 payment date. No share repurchases occurred in the six months ended October 31, 2022.
Important facts for investors to verify
- Whether sales and margins stabilize as demand normalizes and distributor inventories adjust, particularly given sharply lower shipments than the year-earlier period.
- Inventory levels, cash generation and working-capital needs, including the planned inventory reduction and the effect of elevated stock on future results.
- Actual relocation spending, project milestones, incentive receipts and progress toward required capital expenditure, job and wage commitments.
- Developments in product-liability and other litigation, including the Highland Park actions, and whether the company can estimate or must accrue additional losses.
- Availability and terms of credit capacity, compliance with covenants, and the company’s ability to fund operations and relocation commitments while maintaining dividends.