# Smith & Wesson Brands, Inc.: Form 10-Q for the period ended Jul 31, 2023

- Company: [Smith & Wesson Brands, Inc.](/companies/swbi.md) (CIK 1092796)
- Form: 10-Q
- Filed: 2023-09-07
- Accepted by EDGAR: Sep 7, 2023, 16:16 ET
- Period: 2023-07-31
- Accession: 0000950170-23-047003
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1092796/000095017023047003/swbi-20230731.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1092796/000095017023047003/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-07-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-05-01 to 2023-07-31 | $114.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-05-01 to 2023-07-31 | $83.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-05-01 to 2023-07-31 | $30.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-05-01 to 2023-07-31 | $1.8m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-05-01 to 2023-07-31 | $4.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-05-01 to 2023-07-31 | $1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-05-01 to 2023-07-31 | $3.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-05-01 to 2023-07-31 | $0.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-05-01 to 2023-07-31 | $0.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-05-01 to 2023-07-31 | 46,551,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-05-01 to 2023-07-31 | $40.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-05-01 to 2023-07-31 | $32.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-05-01 to 2023-07-31 | $5.5m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2023-07-31 | $55.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-07-31 | $264.2m | us-gaap:AssetsCurrent |
| Total assets | at 2023-07-31 | $537.7m | us-gaap:Assets |
| Current liabilities | at 2023-07-31 | $85.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-07-31 | $154.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-07-31 | $382.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 17,555 characters.

### Overview

Please refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2023 Annual Report and our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. This section sets forth key objectives and performance indicators used by us as well as key industry data tracked by us.

### First Quarter Fiscal 2024 Highlights

Our operating results for the three months ended July 31, 2023 included the following:

- Net sales were $114.2 million, an increase of $29.8 million, or 35.4%, over the comparable quarter last year.
- Gross margin was 26.6% compared with gross margin of 37.3% for the comparable quarter last year.
- Net income was $3.1 million, or $0.07 per diluted share, slightly lower than the comparable quarter last year.

### Results of Operations

### Net Sales and Gross Profit – For the Three Months Ended July 31, 2023

The following table sets forth certain information regarding net sales and gross profit for the three months ended July 31, 2023 and 2022 (dollars in thousands):

|  | 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Handguns | $86,106 | $59,367 | $26,739 | 45.0% |
| Long Guns | 18,782 | 14,105 | 4,677 | 33.2% |
| Other Products & Services | 9,355 | 10,922 | (1,567) | -14.3% |
| Total net sales | $114,243 | $84,394 | $29,849 | 35.4% |
| Cost of sales | 83,842 | 52,923 | 30,919 | 58.4% |
| Gross profit | $30,401 | $31,471 | $(1,070) | -3.4% |
| % of net sales (gross margin) | 26.6% | 37.3% |  |  |

The following table sets forth certain information regarding firearm units shipped by trade channel for the three months ended July 31, 2023 and 2022 (units in thousands):

| Total Units Shipped | 2023 | 2022 | # Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Handguns | 174 | 128 | 46 | 35.9% |
| Long Guns | 39 | 28 | 11 | 39.3% |
| **Sporting Goods Channel Units Shipped** | **2023** | **2022** | **# Change** | **% Change** |
| Handguns | 161 | 116 | 45 | 38.8% |
| Long Guns | 33 | 25 | 8 | 32.0% |
| **Professional Channel Units Shipped** | **2023** | **2022** | **# Change** | **% Change** |
| Handguns | 13 | 12 | 1 | 8.3% |
| Long Guns | 6 | 3 | 3 | 100.0% |

Sales of our handguns increased $26.7 million, or 45.0%, over the comparable quarter last year, primarily due to increased shipments of our revolvers, increased shipments of newly introduced products (defined as any new SKU not shipped in the comparable quarter last year), which represented 29.9% of handgun sales in the period, as well as a 5% price increase on select products that became effective in the second quarter of fiscal 2023. Handgun unit shipments into the sporting goods channel increased by 38.8% over the comparable quarter last year while overall consumer handgun demand decreased 13.4% (as indicated by adjusted background checks reported in the National Instant Criminal Background Check System, or NICS). During the current quarter, inventory in the channel increased slightly whereas, during the prior year comparable quarter, inventory in the channel declined.

Sales of our long guns increased $4.7 million, or 33.2%, over the comparable quarter last year, primarily due to increased shipments of newly introduced products, which represented 62.6% of long gun sales in the period. Long gun unit shipments into our sporting goods channel increased 32.0% over the comparable quarter last year while overall consumer demand for long guns decreased 13.2%, as indicated by NICS. During the current quarter, inventory in the channel increased slightly whereas, during the prior year comparable quarter, inventory in the channel declined.

Other products and services revenue decreased $1.6 million, or 14.3%, from the comparable quarter last year, primarily because of decreased sales of component parts and business-to-business services, partially offset by increased sales of handcuffs and licensing revenue.

New products represented 32.8% of sales for the three months ended July 31, 2023 and included five new pistols, one new long gun, and many new product line extensions.

Gross margin for the three months ended July 31, 2023 was 26.6% compared with gross margin of 37.3% for the comparable quarter last year, primarily because of a combination of unfavorable fixed-cost absorption due to lower production volume, the impact of inflation on raw materials and finished parts, which increased approximately 6.0% over the prior year comparable quarter, the impact of inflation on labor costs, particularly as it relates to entry level positions, and unfavorable inventory reserve adjustments, including amortization of capitalized variances, partially offset by a price increase that became effective in the second quarter of fiscal 2023.

Inventory balances decreased $6.4 million between April 30, 2023 and July 31, 2023. While inventory levels, both internally and in the distribution channel, in excess of demand may negatively impact future operating results, it is difficult to forecast the potential impact of distributor inventories on future revenue and income as demand is impacted by many factors, including seasonality, new product introductions, news events, political events, and consumer tastes. We expect our inventory levels will decline by the end of the fiscal year due to the completion of a significant portion of the operational transition to the new Maryville facility combined with alignment of production capacity to channel inventory and consumer demand.

### Operating Expenses

The following table sets forth certain information regarding operating expenses for the three months ended July 31, 2023 and 2022 (dollars in thousands):

|  | 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Research and development | $1,799 | $1,673 | $126 | 7.5% |
| Selling, marketing, and distribution | 10,040 | 8,027 | 2,013 | 25.1% |
| General and administrative | 14,213 | 17,854 | (3,641) | -20.4% |
| Total operating expenses | $26,052 | $27,554 | $(1,502) | -5.5% |
| % of net sales | 22.8% | 32.6% |  |  |

Research and development expenses remained relatively flat compared with the prior year comparable quarter with the slight increase due to additional headcount and sample costs associated with new product development. Selling, marketing, and distribution expenses increased $2.0 million primarily as a result of a $2.0 million impairment on distribution equipment related to the Relocation. General and administrative expenses decreased $3.6 million, primarily because of a decrease of $2.7 million in profit sharing expense and decreased legal-related expenses, partially offset by increased compensation-related expenses. Fiscal 2024 general and administrative expenses were also lower than the prior year comparable quarter due to a change in where sublease-related income is recorded. During the three months ended July 31, 2023, sublease income of $406,000 was recorded in general and administrative expenses whereas, in fiscal 2023, $544,000 was reported in other income/(expense).

### Operating Income

The following table sets forth certain information regarding operating income for the three months ended July 31, 2023 and 2022 (dollars in thousands):

|  | 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Operating income | $4,349 | $3,917 | $432 | 11.0% |
| % of net sales (operating margin) | 3.8% | 4.6% |  |  |

20

Operating income for the three months ended July 31, 2023 increased $432,000 over the comparable quarter last year, primarily because of increased sales volumes, decreased profit sharing expenses, and decreased legal-related expenses. These favorable impacts were partially offset by unfavorable fixed cost absorption and unfavorable inventory reserve adjustments, including amortization of capitalized variances.

### Income Taxes

The following table sets forth certain information regarding income tax expense for the three months ended July 31, 2023 and 2022 (dollars in thousands):

|  | 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Income tax expense | $1,431 | $845 | $586 | 69.3% |
| % of income from operations (effective tax rate) | 31.5% | 20.3% |  | 11.2% |

Income tax expense increased $586,000 over the comparable quarter last year as a result of higher operating income. Excluding the impact of discrete stock compensation items, the effective tax rate would have been 24.7% and 23.6% for the period ended July 31, 2023 and 2022, respectively.

### Net Income

The following table sets forth certain information regarding net income and the related per share data for the three months ended July 31, 2023 and 2022 (dollars in thousands, except per share data):

|  | 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Income from operations | $3,118 | $3,312 | $(194) | -5.9% |
| Net income per share |  |  |  |  |
| Basic | $0.07 | $0.07 | $— | 0.0% |
| Diluted | $0.07 | $0.07 | $— | 0.0% |

Net income for the three months ended July 31, 2023 was flat to the comparable quarter last year for the reasons outlined above.

### Liquidity and Capital Resources

Our principal cash requirements are to (1) finance the growth of our operations, including working capital and capital expenditures; (2) fund the Relocation; and (3) return capital to stockholders. Capital expenditures for the Relocation, new product development, and repair and replacement of equipment represent important cash needs.

The following table sets forth certain cash flow information for the three months ended July 31, 2023 and 2022 (dollars in thousands):

|  | 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Operating activities | $40,630 | $7,145 | $33,485 | 468.7% |
| Investing activities | (32,067) | (11,586) | (20,481) | -176.8% |
| Financing activities | (6,640) | (5,835) | (805) | -13.8% |
| Total cash flow | $1,923 | $(10,276) | $12,199 | -118.7% |

### Operating Activities

On an annual basis, operating activities generally represent the principal source of our cash flows. Cash provided by operating activities was $40.6 million for the three months ended July 31, 2023 compared with $7.1 million of cash generated for the three months ended July 31, 2022. Cash provided by operating activities for the three months ended July 31, 2023 was positively impacted by a $52.2 million incremental decrease in inventory resulting from increased sales and lower production, partially offset by a $11.9 million incremental increase in accounts receivable due to increased sales, and a $5.3 million incremental decrease in accrued expenses due to a reduction in federal excise tax payable.

### Investing Activities

Cash used in investing activities increased $20.5 million for the three months ended July 31, 2023 compared with the prior year comparable period. We paid $32.1 million for capital expenditures for the three months ended July 31, 2023, of which $30.4 million related to the Relocation, including $443,000 for capitalized interest. Excluding payments related to the Relocation, we expect to spend between $20.0 million and $25.0 million on capital expenditures in fiscal 2024.

We expect to spend between $70.0 million and $75.0 million on capital expenditures related to the Relocation in fiscal 2024, of which $50.0 million to $55.0 million is for the construction of the facility.

### Financing Activities

Cash used in financing activities was $6.6 million for the three months ended July 31, 2023, which was primarily the result of a $5.5 million dividend distribution. Cash used in financing activities was $5.8 million for the three months ended July 31, 2022, which was primarily the result of a $4.6 million dividend distribution.

*Finance Lease –* We are a party to a material finance lease, the Missouri Lease, which is a $46.2 million lease for our Missouri distribution center that has an effective interest rate of approximately 5.0% and is payable in 240 monthly installments through fiscal 2039. The building is pledged to secure the amounts outstanding. During fiscal 2024, we paid approximately $305,000 in principal payments relating to the Missouri Lease. With the completion of the Separation, we entered into the Missouri Sublease. On July 16, 2022, we entered into an amendment to the Missouri Sublease, increasing the subleased space to 64.7% of the facility under the same terms as the Missouri Lease. On January 31, 2023, we entered into the Assignment and Assumption Agreement and the Amended and Restated Guaranty. We intend to terminate the Missouri Sublease on or around the effective date of the Assignment and Assumption Agreement. We recorded $581,000 of income related to the Missouri Sublease, of which $289,000 was recorded in general and administrative expenses and $292,000 was recorded in interest income in our condensed consolidated statements of income.

*Credit Facilities —* We maintain an unsecured revolving line of credit with TD Bank, N.A. and other lenders, or the Lenders, which includes availability up to $100.0 million at any one time, or the Revolving Line. The Revolving Line provides for availability for general corporate purposes, with borrowings to bear interest at either the Base Rate or SOFR rate, plus an applicable margin based on our consolidated leverage ratio, as of July 31, 2023. The credit agreement also provides a swingline facility in the maximum amount of $5.0 million at any one time (subject to availability under the Revolving Line). Each swingline loan bears interest at the Base Rate, plus an applicable margin based on our consolidated leverage ratio. In response to a Springing Lien Triggering Event (as defined in the credit agreement), we would be required to enter into certain documents that create in favor of TD Bank, N.A., as administrative agent, and the lenders party to such documents as legal, valid, and enforceable first priority lien on the collateral described therein. Subject to the satisfaction of certain terms and conditions described in the credit agreement, we have an option to increase the Revolving Line by an aggregate amount not exceeding $50.0 million. The Revolving Line matures on the earlier of August 24, 2025, or the date that is six months in advance of the earliest maturity of any permitted notes under the credit agreement. On April 28, 2023, we entered into an amendment to our existing credit agreement to, among other things, replace LIBOR with SOFR as the interest rate benchmark and amend the definition of “Consolidated Fixed Charge Coverage Ratio” to exclude unfinanced capital expenditures in connection with the Relocation.

As of July 31, 2023, we had $25.0 million of borrowings outstanding on the Revolving Line, bearing interest at a rate of 6.82%, which was equal to the SOFR rate plus an applicable margin.

The credit agreement for our credit facility contains financial covenants relating to maintaining maximum leverage and minimum debt service coverage. We were in compliance with all debt covenants as of July 31, 2023.

*Dividends —* In June 2023, our Board of Directors authorized a regular quarterly dividend for stockholders of $0.12 per share. The current dividend will be for stockholders of record as of market close on September 21, 2023 and will be payable on October 5, 2023.

Our future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, and costs related to the Relocation. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.

As of July 31, 2023, we had $55.5 million in cash and cash equivalents on hand. Based upon our current working capital position, current operating plans, and expected business conditions, we believe that our existing capital resources and credit facilities will be adequate to fund our operations, including our finance leases and other commitments, for the next 12 months.

### Other Matters

### Critical Accounting Policies

The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant accounting policies are disclosed in Note 2 of the Notes to the Consolidated Financial Statements in our Fiscal 2023 Annual Report. The most significant areas involving our judgments and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2023 Annual Report, to which there have been no material changes. Actual results could differ from our estimates.

### Recent Accounting Pronouncements

The nature and impact of recent accounting pronouncements, if any, is discussed in Note *2—Basis of Presentation* to our condensed consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

## Market risk

As filed, 152 characters.

During the period ended July 31, 2023, we did not enter into or transact any forward option contracts nor did we have any forward contracts outstanding.

## Controls and procedures

As filed, 1,365 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 31, 2023, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act was recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Sep 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-047003. Last ingested by Listed: Oct 29, 2026, 04:31 ET. No prices; not investment advice.