Smith & Wesson Brands, Inc. — Form 10-Q Summary
Business context and reporting period
For the three months ended July 31, 2021 (first quarter fiscal 2022), Smith & Wesson reported its firearms and related-products business. The outdoor products and accessories business was spun off in August 2020 and is presented as discontinued operations; the prior-year comparison therefore includes $5.1 million of discontinued-operations income in net income.
Financial results and liquidity
| Metric | Q1 FY2022 | Comparable quarter |
|---|---|---|
| Net sales | $274.6 million | $229.9 million |
| Gross profit / gross margin | $129.9 million / 47.3% | $92.4 million / 40.2% |
| Operating income / operating margin | $99.9 million / 36.4% | $58.7 million / 25.6% |
| Income from continuing operations | $76.9 million | $43.3 million |
| Diluted EPS from continuing operations | $1.57 | $0.77 |
| Cash from operating activities | $109.1 million | $81.7 million |
- Sales rose 19.5%; handgun revenue increased 19.8% and long-gun revenue increased 25.7%. Other products and services revenue fell 16.6%.
- Gross margin expanded 7.1 percentage points. Management attributed the improvement mainly to price increases, lower promotional spending, and favorable manufacturing fixed-cost absorption, partly offset by volume-related costs.
- Cash and cash equivalents were $171.4 million at quarter-end, up from $113.0 million at April 30, 2021. The company reported no revolving-credit borrowings and no outstanding indebtedness apart from lease obligations. Finance lease liabilities totaled $39.6 million; total operating and finance lease liabilities were $44.3 million.
- Current assets were $318.3 million and current liabilities were $138.8 million. Inventory was $97.1 million, up from $78.5 million at April 30.
- Investing activities used $5.8 million, including $5.8 million of capital expenditures. Financing activities used $44.9 million, principally for $40.0 million of share repurchases and $3.8 million of dividends.
Material changes versus the prior comparable period
- Operating income increased 70.0%, while continuing-operations income increased 77.6%. Lower general and administrative costs also contributed, including $3.6 million less in separation-related expense and $1.4 million in separation-related synergy savings.
- Interest expense declined to $0.5 million from $1.3 million, following repayment of revolving debt in fiscal 2021.
- Firearm shipments increased 7.4% for handguns and 22.3% for long guns. Sporting-goods-channel shipments rose despite reported NICS checks declining 35.5% for handguns and 25.9% for long guns year over year; management cited channel restocking and product preference.
- Operating cash flow rose year over year. The quarter’s cash generation benefited from collections of receivables and income-tax-related working-capital movements, while inventory growth and lower accrued payroll balances were offsets.
- Basic weighted-average shares fell to 48.4 million from 55.5 million, reflecting the lower share count; the company repurchased 1.97 million shares for $40.0 million in the quarter.
Outlook, commentary, risks, and unusual items
- Management expects finished-goods inventory to continue increasing in the next quarter as it restocks product selection and prepares for a possible future increase in consumer demand. It cited consumer demand moderating toward summer-seasonal levels.
- Fiscal 2022 capital expenditures are expected to be $25 million to $30 million, compared with $22.1 million in fiscal 2021, principally for new-product development and equipment repair and replacement. The filing provides no specific revenue or earnings guidance.
- Management believes cash, operating resources, and credit facilities will fund operations and commitments for at least the next 12 months. The unsecured revolving facility provides up to $100 million; it was undrawn at July 31, with $2.7 million of letters of credit outstanding. The company was in compliance with its debt covenants.
- The board authorized a further $50 million share-repurchase program, available through August 2022; no purchases had been made under it by July 31. On August 30, the board declared a quarterly dividend of $0.08 per share, payable September 28 to holders of record September 14.
- Material litigation includes product-liability matters, the Gemini dispute seeking $18.6 million, a Canadian proposed class action, and a lawsuit filed by the Mexican government on August 4, 2021. The AcuSport-related actions were settled in August 2021. The company states it cannot reasonably estimate the range of possible additional litigation losses and has not accrued for material adverse judgments.
- Key risks identified include changes in firearm demand and regulation, supply and raw-material costs, competition, order cancellations, and litigation. Interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether channel restocking and shipment growth can persist as consumer demand moderates, and how inventory levels develop.
- Whether elevated gross margins and operating profitability are sustainable after price increases and reduced promotional activity.
- Working-capital and cash-flow trends, including the effects of receivable collections, tax payments, and inventory investment.
- Actual capital spending, use of the new repurchase authorization, and the company’s ability to maintain its dividend and liquidity.
- Developments in significant litigation and any future disclosures of reasonably estimable potential losses.