Smith & Wesson Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended October 31, 2021. Figures are unaudited; dollar amounts are in millions except per-share data. The company designs and manufactures firearms and related products. Comparisons below are with the corresponding 2020 periods; the outdoor products and accessories business was spun off in August 2020 and is reported as discontinued operations.
Key financial results
| Metric | Three months ended Oct. 31, 2021 | Year-over-year change | Six months ended Oct. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $230.5 | Down 7.3% | $505.1 | Up 5.5% |
| Gross profit / margin | $102.0 / 44.3% | Profit up 0.9%; margin up 370 bps | $231.9 / 45.9% | Profit up 19.9%; margin up 550 bps |
| Operating income / margin | $65.4 / 28.4% | Income up 1.6% | $165.3 / 32.7% | Income up 34.2% |
| Income from continuing operations | $50.9; diluted EPS $1.05 | Income up 3.7%; diluted EPS was $0.87 | $127.8; diluted EPS $2.63 | Income up 38.3%; diluted EPS was $1.64 |
| Cash from operating activities | Not provided for the quarter | — | $105.4 | Down from $138.1 |
Second-quarter firearm sales were weaker: handguns declined 2.2% and long guns declined 20.6%. For the six-month period, handgun sales rose 8.9%, while long-gun sales fell 1.4%. The company attributed stronger margins to price increases, product mix and manufacturing fixed-cost absorption, partly offset by relocation-related costs and, for the six-month period, higher manufacturing spending.
Balance sheet, cash flow and capital allocation
- Cash and cash equivalents were $159.4 at October 31, up from $113.0 at April 30, 2021. Net cash provided by operating activities was $105.4; investing activities used $10.2 and financing activities used $48.8 during the six months.
- Inventory rose $41.8 from April 30 to $120.3, including a $20.1 increase in finished goods and $18.7 in finished parts. Management said inventory was being rebuilt to improve product availability and mitigate supply-chain risk.
- The company reported no borrowings on its $100.0 revolving credit facility and said it had no outstanding indebtedness under that facility. Finance lease liabilities were $39.3, primarily associated with the Missouri logistics facility. The company reported compliance with debt covenants.
- Current assets were $333.9 and current liabilities $103.7 at October 31. Stockholders’ equity was $348.3.
- During the six months, the company completed a $40.0 share repurchase and paid $7.7 in dividends. A further $50.0 repurchase authorization, valid through August 2022, had not been used as of October 31. A quarterly dividend of $0.08 per share was declared for payment in January 2022.
Outlook, commentary and notable risks
- Demand and inventory: Management said consumer demand was easing from pandemic-era highs, competitor products were more available, and its market share likely declined from peak levels. It expects finished-goods inventory to increase further in the next quarter. Excess inventory in the company or distribution channel could pressure future results; demand depends on factors including seasonality, new products, news and political events, and consumer preferences.
- Relocation: The company plans to move its headquarters and significant operations to Maryville, Tennessee, in 2023. The project agreement calls for at least $120.0 of aggregate capital expenditures by December 31, 2025, at least 620 new jobs, and an average hourly wage of at least $25.97. The company reported $5.5 of relocation-related restructuring charges through October 31 and no relocation capital expenditures to that date. Fiscal 2022 capital spending was estimated at $25–$35, including $15–$20 for construction. Management identified execution, cost, workforce-transition and incentive-commitment risks.
- Legal matters: Proceedings include Gemini’s claim seeking $18.6 in damages, product-liability cases and claims, and litigation brought by the Mexican government. The company says it intends to defend the claims. It stated that it could not estimate a range of reasonably possible additional losses from material adverse judgments and had not accrued for such judgments; it believes its defense-cost accruals are adequate. An unfavorable or prolonged outcome could harm the business.
- Other risks and liquidity outlook: OSHA’s COVID-19 vaccination-or-testing standard was stayed by a federal appeals court; the company was assessing potential effects. Management believes cash and available credit facilities are adequate for operations and commitments for the next 12 months, but notes that future financing may not be available on acceptable terms.
- Comparison caveat: 2020 comparative net income included discontinued-operation income of $3.1 for the quarter and $8.2 for the six months. Continuing-operations results are the more comparable measure for the ongoing firearms business.
Important facts for investors to verify
- Whether demand, channel inventory and market share stabilize, particularly for long guns and sporting-goods-channel sales.
- Whether the Tennessee relocation remains on schedule and within budget, and whether the company meets its spending, hiring and wage commitments.
- How inventory growth and supply-chain conditions affect cash generation, margins and future shipments.
- Developments in the disclosed litigation and whether the company can later estimate potential loss exposure.
- Future capital spending, repurchases and dividends relative to the company’s cash needs and stated 12-month liquidity assessment.