SMITH & WESSON BRANDS, INC. 
Overview
Please refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 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. The results of AOUT, our former outdoor products and accessories business, which were previously reported in the Outdoor Products & Accessories segment, are being presented as discontinued operations in the condensed consolidated statements of income for all periods presented following the Separation as described above. See Note 3 - Discontinued Operations in the notes to condensed consolidated financial statements for additional information regarding these discontinued operations. Unless otherwise indicated, any reference to income statement items in this Management's Discussion and Analysis of Financial Condition and Results of Operations refers to results from continuing operations.
Second Quarter Fiscal 2022 Highlights
Our operating results for the three months ended
? Net sales were$230.5 million , a decrease of$18.3 million , or 7.3%, from the comparable quarter last year. ? Gross margin was 44.3%, compared with gross margin of 40.6% for the comparable quarter last year. ? Income from continuing operations was$50.9 million , or$1.05 per diluted share, compared with income from continuing operations of$49.1 million , or$0.87 per diluted share, for the comparable quarter last year.
Our operating results for the six months ended
? Net sales were$505.1 million , an increase of$26.5 million , or 5.5%, over the prior year comparable period. ? Gross margin was 45.9%, an increase of 550 basis points over the prior year comparable period. ? Income from continuing operations was$127.8 million , or$2.63 per diluted share, compared with income from continuing operations of$92.4 million , or$1.64 per diluted share, for the prior year comparable period. ? OnSeptember 30, 2021 , we announced the Relocation. In connection with the Relocation, we will build a new facility inMaryville, Tennessee and our corporate headquarters, some of ourSpringfield manufacturing operations, a portion of ourDeep River, Connecticut plastic injection molding facility, and ourColumbia, Missouri distribution operations will be relocated toMaryville, Tennessee . We expect to incur capital expenditures in connection with the construction and equipping of the new facility in an aggregate amount of no less than$120.0 million on or beforeDecember 31, 2025 . ThroughOctober 31, 2021 , we have incurred$5.5 million of restructuring charges related to the Relocation. Results of Operations
The following table sets forth certain information regarding net sales and gross profit for the three months endedOctober 31, 2021 and 2020 (dollars in thousands): 2021 2020 $ Change % Change Handguns$ 157,525 $ 161,034 $ (3,509 ) -2.2 % Long Guns 60,320 75,987 (15,667 ) -20.6 % Other Products & Services 12,634 11,708 926 7.9 % Total sales$ 230,479 $ 248,729 $ (18,250 ) -7.3 % Cost of sales 128,484 147,656 (19,172 ) -13.0 % Gross profit$ 101,995 $ 101,073 $ 922 0.9 % % of net sales (gross margin) 44.3 % 40.6 % 19
-------------------------------------------------------------------------------- The following table sets forth certain information regarding firearm units shipped by trade channel for the three months endedOctober 31, 2021 and 2020 (units in thousands): Total Units Shipped 2021 2020 # Change % Change Handguns 383 455 (72 ) -15.8% Long Guns 109 171 (62 ) -36.3% Sporting Goods Channel Units Shipped 2021 2020 # Change % Change Handguns 360 420 (60 ) -14.3% Long Guns 104 166 (62 ) -37.3% Professional Channel Units Shipped 2021 2020 # Change % Change Handguns 23 35 (12 ) -34.3% Long Guns 5 5 - - Sales of our handguns decreased$3.5 million , or 2.2%, from the comparable quarter last year. The decrease in sales was primarily because of decreased shipments of our M&P branded polymer pistols, partially offset by increased shipments of revolvers and two price increases, one inNovember 2020 and one inJune 2021 . Handgun unit shipments into the sporting goods channel decreased by 14.3% from the comparable quarter last year while overall consumer demand decreased 24.2% (as indicated by adjusted background checks reported in the National Instant Criminal Background Check System, or NICS). However, based on data we track internally on distributor and strategic retailer inventory levels in the channel in certain of our handgun products, we believe that a significant portion of our unit shipments were used to replenish inventories in the distribution and retail channels, and after adjusting for this, we believe our market share likely declined in the quarter as compared to NICS. We believe this is due to the significant market share gains we achieved as a result of the historic demand levels during the pandemic, and with demand levels now easing, competitor offerings are more available at retail, which likely resulted in a market share decline for us from our peak levels, although we believe we still maintain our leadership position. Sales of our long guns decreased$15.7 million , or 20.6%, from the comparable quarter last year. The decrease in sales was primarily because of decreased shipments of our hunting rifles as a result of the planned divestiture of that product line combined with lower shipments of our M&P modern sporting rifles, partially offset by increased shipments of a newly introduced product in the quarter and two price increases. Long gun unit shipments into our sporting goods channel decreased 37.3% from the comparable quarter last year. Excluding shipments ofThompson /Center branded products, long gun units decreased 12.7% as compared with a 16.2% decrease in reported NICS checks. However, based on data we track internally on distributor and strategic retailer inventory levels in the channel in certain of our long gun products, we believe that a significant portion of our unit shipments were used to replenish inventories in the distribution and retail channels, and after adjusting for this, we believe our market share likely declined in the quarter as compared to NICS. We believe this is due to the significant market share gains we achieved as a result of the historic demand levels during the pandemic, and with demand levels now easing, competitor offerings are more available at retail, which likely resulted in a market share decline for us from our peak levels, although we believe we still maintain our leadership position.
Other products and services revenue increased
New products, defined as any new SKU not shipped in the comparable quarter last year, represented 12.8% of sales for the three months endedOctober 31, 2021 and included a new M&P branded long gun and many new M&P product line extensions. Gross margin for the three months endedOctober 31, 2021 was 44.3%, compared with gross margin of 40.6% for the comparable quarter last year, primarily because of price increases, combined with a shift in mix to higher margin products, and favorable manufacturing fixed-cost absorption, partially offset by expenses recorded related to employee severance and relocation costs associated with the Relocation. As expected, our inventory balances increased$41.8 million betweenApril 30, 2021 andOctober 31, 2021 , as we replenished stock to provide our customers with a more robust selection of inventory and prepared for the next increase in consumer demand. We increased our finished parts inventory by$18.7 million in an effort to reduce the risk of potential supply chain issues. 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 finished goods inventory will continue to increase in the next quarter as we bring our stock to a more desired level in anticipation of future consumer demand. 20 --------------------------------------------------------------------------------
The following table sets forth certain information regarding net sales and gross profit for the six months endedOctober 31, 2021 and 2020 (dollars in thousands): 2021 2020 $ Change % Change Handguns$ 355,381 $ 326,211 $ 29,170 8.9 % Long Guns 128,012 129,834 (1,822 ) -1.4 % Other Products & Services 21,695 22,569 (874 ) -3.9 % Total Revenue$ 505,088 $ 478,614 $ 26,474 5.5 % Cost of sales 273,151 285,117 (11,966 ) -4.2 % Gross profit$ 231,937 $ 193,497 $ 38,440 19.9 % % of net sales (gross margin) 45.9 % 40.4 % The following table sets forth certain information regarding firearm units shipped by trade channel for the six months endedOctober 31, 2021 and 2020 (units in thousands): Total Units Shipped 2021 2020 # Change % Change Handguns 890 927 (37 ) -4.0% Long Guns 246 283 (37 ) -13.1% Sporting Goods Channel Units Shipped 2021 2020 # Change % Change Handguns 834 861 (27 ) -3.1% Long Guns 235 274 (39 ) -14.2% Professional Channel Units Shipped 2021 2020 # Change % Change Handguns 56 66 (10 ) -15.2% Long Guns 11 9 2 22.2% Sales of our handguns increased$29.2 million , or 8.9%, over the prior year comparable period. The increase in revenue was primarily due to increased shipments of a new concealed carry polymer pistol introduced in the fourth quarter of fiscal 2021 combined with two prices increases, one inNovember 2020 and one inJune 2021 . As compared with the prior year, revolver sales were lower due to inventory on hand at the start of the prior fiscal year. During the current period, we did not offer any promotional programs and fulfilled very few older promotional orders, which resulted in an increase in average selling prices compared with the prior period when we fulfilled numerous promotional orders that were offered prior to the increase in demand inMarch 2020 . Unit shipments into the sporting goods channel decreased by 3.1% from the comparable period last year while overall consumer demand decreased 30.4% as indicated by NICS, however, we believe that a significant portion of our unit shipments were used to replenish inventories in the distribution and retail channels, and after adjusting for this, we believe our market share likely declined as compared to NICS. We believe this is due to the significant market share gains we achieved as a result of the historic demand levels during the pandemic, and with demand levels now easing, competitor offerings are more available at retail, which likely resulted in a market share decline for us from our peak levels, although we believe we still maintain our leadership position. Sales from our long guns decreased$1.8 million , or 1.4%, from the prior year comparable period primarily because of lower shipments of our hunting rifles as a result of the planned divestiture of that product line and decreased shipments of our M&P modern sporting rifles, partially offset by increased shipments of a newly introduced product in the quarter and two price increases. Unit shipments into our sporting goods channel decreased 14.2% compared with a 20.8% decrease in NICS checks versus the prior year comparable period, however, we believe that a significant portion of our unit shipments were used to replenish inventories in the distribution and retail channels, and after adjusting for this, we believe our market share likely declined as compared to NICS. We believe this is due to the significant market share gains we achieved as a result of the historic demand levels during the pandemic, and with demand levels now easing, competitor offerings are more available at retail, which likely resulted in a market share decline for us from our peak levels, although we believe we still maintain our leadership position. Other products and services revenue decreased$874,000 , or 3.9%, from the prior year comparable period, primarily because of decreased sales of component parts and handcuffs, partially offset by an increase in sales for business-to-business services.
New products represented 16.0% of sales for the six months ended
Gross margin for the six months ended
21
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promotional product spending. These increases were partially offset by increased
manufacturing spending and employee severance and relocation costs associated
with the Relocation.
Operating Expenses
The following table sets forth certain information regarding operating expenses
for the three months ended October 31, 2021 and 2020 (dollars in thousands):
2021 2020 $ Change % Change
Research and development $ 1,744 $ 1,855 $ (111 ) -6.0 %
Selling, marketing, and distribution 11,423 11,614 (191 ) -1.6 %
General and administrative 23,436 23,224 212 0.9 %
Total operating expenses $ 36,603 $ 36,693 $ (90 ) -0.2 %
% of net sales 15.9 % 14.8 %
Research and development expenses decreased $111,000 from the comparable quarter
last year, primarily as a result of decreased compensation-related expenses.
Selling, marketing, and distribution expenses decreased $191,000 , primarily as a
result of decreased compensation-related expenses and lower spending on targeted
customer promotions, partially offset by increased marketing related expenses
and increased travel and entertainment costs. General and administrative
expenses increased $212,000 , primarily because of $4.2 million in costs
associated with the Relocation and $2.9 million of increased legal costs,
partially offset by $4.8 million of decreased expenses related to the Separation
and $1.6 million of decreased compensation-related costs due to synergy savings
realized from the Separation.
The following table sets forth certain information regarding operating expenses
for the six months ended
2021 2020 $ Change % Change
Research and development $ 3,552 $ 3,761 $ (209 ) -5.6 %
Selling, marketing, and distribution 22,057 21,609 448 2.1 %
General and administrative 41,049 45,007 (3,958 ) -8.8 %
Total operating expenses $ 66,658 $ 70,377 $ (3,719 ) -5.3 %
% of net sales 13.2 % 14.7 %
Research and development expenses decreased $209,000 from the prior year
comparable period, primarily as a result of decreased depreciation and
compensation-related costs. Selling, marketing, and distribution expenses
increased $448,000 over the prior year comparable period, primarily because of
increased marketing costs, increased compensation-related expense, and increased
travel and entertainment expenses, partially offset by decreased spending in
targeted customer promotions. General and administrative expenses decreased $4.0
million primarily because of a decrease of $8.4 million related to the
Separation and $2.8 million of lower compensation-related expenses due to
synergy savings realized from the Separation, partially offset by an increase of
$4.2 million of costs associated with the Relocation and $3.1 million of
increased legal related expenses.
Operating Income from Continuing Operations
The following table sets forth certain information regarding operating income
for the three months ended
2021 2020 $
Change % Change
Operating income from continuing operations
1.6 %
% of net sales (operating margin) 28.4 % 25.9 %
Operating income from continuing operations for the three months ended October
31, 2021 increased $1.0 million over the comparable quarter last year, primarily
because of a 370 basis point improvement in gross margin. Operating income from
continuing operations was also positively impacted by favorable manufacturing
fixed-cost absorption, lower promotional product spending, lower spending
related to the Separation, and decreased co-op advertising costs. These
favorable impacts were partially offset by increased volume-related
manufacturing spending, increased costs associated with the Relocation, and
increased legal costs.
22
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The following table sets forth certain information regarding operating income
for the six months ended
2021 2020 $ Change % Change
Operating income from continuing operations $ 165,279 $ 123,120 $ 42,159 34.2 %
% of net sales (operating margin) 32.7 % 25.7 %
Operating income from continuing operations for the six months ended October 31,
2021 increased $42.2 million over the prior year comparable period, primarily
because increased revenue and a 550 basis point improvement in gross margin.
Operating income from continuing operations was also positively impacted by
favorable manufacturing fixed-cost absorption, lower promotional product
spending, a decrease in expenses related to the Separation, and a decrease in
compensation-related expenses. These increases were partially offset by costs
associated with the Relocation, increased legal costs, increased manufacturing
spending, and increased profit-sharing expense.
Interest Expense
The following table sets forth certain information regarding interest expense
for the three months ended
2021 2020 $ Change % Change
Interest expense
For the three months endedOctober 31, 2021 , interest expense decreased by$1.0 million from the comparable quarter last year as a result of the repayment of all amounts outstanding on our revolving line of credit during the second quarter of fiscal 2021.
The following table sets forth certain information regarding interest expense
for the six months ended
2021 2020 $ Change % Change
Interest expense $ (1,011 ) $ (2,806 ) $ (1,795 ) -64.0 %
During the six months ended October 31, 2021 , interest expense decreased by $1.8
million from the prior year comparable period as a result of the repayment of
all amounts outstanding on our revolving line of credit during the second
quarter of fiscal 2021.
Income Taxes
The following table sets forth certain information regarding income tax expense
for the three months ended October 31, 2021 and 2020 (dollars in thousands):
2021 2020 $ Change % Change
Income tax expense $ 14,824 $ 14,465 $ 359 2.5 %
% of income from operations (effective
tax rate) 22.5 % 22.7 % -0.2 %
Income tax expense increased
The following table sets forth certain information regarding income tax expense
for the six months ended
2021 2020 $ Change % Change
Income tax expense $ 37,944 $ 28,657 $ 9,287 32.4 %
% of income from operations (effective
tax rate) 22.9 % 23.7 % -0.8 %
23
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Income tax expense increased
Income from Continuing Operations
The following table sets forth certain information regarding income from
continuing operations and the related per share data for the three months ended
2021 2020 $ Change % Change
Income from continuing operations $ 50,935 $ 49,118 $ 1,817 3.7 %
Net income per share
Basic - continuing $ 1.06 $ 0.88 $ 0.18 20.5 %
Diluted - continuing $ 1.05 $ 0.87 $ 0.18 20.7 %
Income from continuing operations for the three months ended October 31, 2021
was $50.9 million compared with $49.1 million for the comparable quarter last
year for the reasons outlined above.
The following table sets forth certain information regarding income from
continuing operations and the related per share data for the six months ended
2021 2020 $ Change % Change
Income from continuing operations $ 127,817 $ 92,417 $ 35,400 38.3 %
Net income per share
Basic - continuing $ 2.65 $ 1.66 $ 0.99 59.6 %
Diluted - continuing $ 2.63 $ 1.64 $ 0.99 60.4 %
Income from continuing operations for the six months ended October 31, 2021 was
$127.8 million compared with $92.4 million for 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, additional manufacturing capacity, and repair and replacement of equipment represent important cash needs.
The following table sets forth certain cash flow information for the six months
ended
2021 2020 $ Change % Change
Operating activities $ 105,364 $ 138,088 $ (32,724 ) -23.7 %
Investing activities (10,199 ) (15,314 ) 5,115 33.4 %
Financing activities (48,791 ) (188,702 ) 139,911 74.1 %
Total cash flow $ 46,374 $ (65,928 ) $ 112,302 170.3 %
Operating Activities
On an annual basis, operating activities generally represent the principal
source of our cash flow. Cash provided by operating activities was $105.4
million for the six months ended October 31, 2021 compared with $138.1 million
of cash generated for the six months ended October 31, 2020 . Cash provided by
operating activities from continuing operations for the six months ended October
31, 2021 was favorably impacted by income of $143.0 million before depreciation
and amortization, a $30.2 million incremental decrease in accounts receivable
due to timing of shipments and customer payments, a $15.0 million incremental
increase in accrued expenses as a result of the payment of deferred federal
excise tax liabilities during the first quarter of fiscal 2021, and the
fulfillment of performance obligations relating to sales promotions in the prior
year. These favorable impacts were partially offset by an incremental $66.7
million increase in inventory due to increased production capacity offset by
reduced consumer demand, an incremental $36.8 million decrease in accounts
payable, and an incremental $5.3 million reduction in accrued payroll and
incentive accruals due to the payment of management incentive bonuses in the
first quarter.
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Investing Activities
Cash used in investing activities decreased$5.1 million for the six months endedOctober 31, 2021 compared with the prior year comparable period. We recorded capital expenditures of$10.1 million for the six months endedOctober 31, 2021 ,$4.9 million lower than the prior year comparable period, which included machinery and equipment utilized to increase capacity. Excluding spending related to the Relocation, we currently expect to spend between$20.0 million and$25.0 million on capital expenditures in fiscal 2022, a decrease of$2.1 million to an increase of$2.9 million , as compared with$22.1 million in capital expenditures in fiscal 2021. This is primarily due to lower spending on capacity increases offset by new product development and repair and replacement of equipment. Additionally, as it relates to the Relocation, we expect to incur capital expenditures in connection with the construction and equipping of the new facility in an aggregate amount of not less than$120.0 million on or beforeDecember 31, 2025 . We currently expect to spend between$25.0 million and$35.0 million on capital expenditures in fiscal 2022, of which$15.0 million to$20.0 million is expected for the construction of the facility. This spending will be recorded in construction in progress throughout the building construction. Through the six months endedOctober 31, 2021 , we have had no capital expenditures in connection with the Relocation.
Financing Activities
Cash used in financing activities was$48.8 million for the six months endedOctober 31, 2021 compared with$188.7 million for the six months endedOctober 31, 2020 . Cash used in financing activities during the six months endedOctober 31, 2021 was primarily the result of a$40.0 million treasury stock repurchase and a$7.7 million dividend distribution. For the six months endedOctober 31, 2020 , cash used in financing activities was primarily a result of a net repayment of$160.0 million of borrowings on our credit facility and funding a distribution of$25.0 million to our discontinued operations. Finance Lease - We are a party to a$46.2 million lease for our national logistics facility inColumbia, Missouri , which 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 the six months endingOctober 31, 2021 , we paid$505,500 in principal payments relating to this finance lease. With the completion of the Separation onAugust 24, 2020 , we entered into a sublease for 59.0% of this facility under the same terms as the master lease. We have recorded$1.1 million of income related to this sublease agreement, which is recorded in other income/(expense) in our condensed consolidated statements of income. Credit Facilities - As ofOctober 31, 2021 , we had no outstanding indebtedness. However, we maintain an unsecured revolving line of credit withTD Bank, N.A . and other lenders, or the Lenders, which includes availability up to$100.0 million at any one time. The revolving line provides for availability for general corporate purposes, with borrowings to bear interest at either the Base Rate or LIBOR rate, plus an applicable margin based on our consolidated leverage ratio, as ofOctober 31, 2021 . 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 ofTD 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 ofAugust 24, 2025 , or the date that is six months in advance of the earliest maturity of any Permitted Notes under the credit agreement.
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
Share Repurchase Programs - OnMarch 2, 2021 , our board of directors authorized the repurchase of up to$100.0 million of our common stock, subject to certain conditions, in the open market or in privately negotiated transactions. During fiscal 2021, we repurchased 3,380,447 shares of our common stock for$60.0 million under this authorization. During the six months endedOctober 31, 2021 , we completed this stock repurchase program by repurchasing 1,967,420 shares of our common stock for$40.0 million utilizing cash on hand. OnJune 15, 2021 , our board of directors authorized the repurchase of an additional$50.0 million of our common stock, subject to certain conditions, in the open market or in privately negotiated transactions, which authorization is valid throughAugust 2022 . As ofOctober 31, 2021 , we had not made any purchases under this authorization. Dividends - InJune 2021 , our Board of Directors authorized a regular quarterly dividend for stockholders of$0.08 per share. The dividend will be for stockholders of record as of market close onDecember 16, 2021 and is payable onJanuary 3, 2022 . 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 25
-------------------------------------------------------------------------------- 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 ofOctober 31, 2021 , we had$159.4 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 Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 . 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 Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 , 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.
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