Item 1. Financial Statements
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these condensed consolidated financial statements.
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
(1) Organization:
We are a leading manufacturer, designer, and provider of firearms and firearm-related products for the shooting, hunting, and rugged outdoor enthusiast. We are one of the largest manufacturers of handguns, modern sporting rifles, and handcuffs in the United States and an active participant in the hunting rifle and suppressor markets. We manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and muzzleloaders), handcuffs, suppressors, and other firearm-related products for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We sell our products under the Smith & Wesson, M&P, Performance Center, Thompson/Center Arms, and Gemtech brands. We manufacture our products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We also sell our manufacturing services to other businesses to level-load our factories. We sell those services under our Smith & Wesson and Smith & Wesson Precision Components brands.
On November 13, 2019, we announced that we were proceeding with a plan to spin-off our outdoor products and accessories business and create an independent publicly traded company to conduct that business, or the Separation. On August 24, 2020, or the Distribution Date, we completed the previously announced Separation. See also Note 3 — Discontinued Operations, for more information.
(2) Basis of Presentation:
Interim Financial Information – The condensed consolidated balance sheet as of January 31, 2021, the condensed consolidated statements of income/(loss) and comprehensive income/(loss) for the three and nine months ended January 31, 2021 and 2020, the condensed consolidated statements of changes in stockholders’ equity for the three and nine months ended January 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended January 31, 2021 and 2020 have been prepared by us without audit. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows at January 31, 2021 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2020 has been derived from our audited consolidated financial statements.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020. The results of operations for the three and nine months ended January 31, 2021 may not be indicative of the results that may be expected for the fiscal year ending April 30, 2021, or any other period.
Recently Issued Accounting Standards – In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 2016-13 changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The requirements of ASU 2016-13 are effective for financial statements for annual periods beginning after December 15, 2019, and early adoption is permitted. We adopted ASU 2016-13 on May 1, 2020, and the adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements.
9
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
(3) Discontinued Operations:
On November 13, 2019, we announced the Separation. On the Distribution Date, at 12:01 a.m. Eastern Time, the Separation of our wholly owned subsidiary, American Outdoor Brands, Inc., a Delaware corporation, or AOUT, from our company was completed. The Separation was achieved through the transfer of all the assets and legal entities, subject to any related liabilities, associated with our outdoor products and accessories business to AOUT, or the Transfer, and the distribution of 100% of the AOUT outstanding capital stock to holders of our common stock, or the Distribution, as of the close of business on August 10, 2020, or the Record Date. In connection with the Distribution, our stockholders received one share of AOUT common stock for every four shares of our common stock held as of the close of business on the Record Date. Following the Distribution, AOUT became an independent, publicly traded company, and we retain no ownership interest in AOUT. For the nine months ended January 31, 2021, we recorded $8.4 million in general and administrative expenses related to the Separation and there was no gain/(loss) recognized for the Separation. In connection with the Separation, we distributed $25.0 million in cash to AOUT.
Our common stock continues to trade on the Nasdaq Global Select Market under the new ticker symbol “SWBI,” and AOUT is now trading shares of common stock listed on the Nasdaq Global Select Market under the ticker symbol “AOUT.” The outdoor products and accessories business historical financial data is recorded as discontinued operations. Please refer to our Current Report on Form 8-K filed on August 26, 2020 for more information regarding the Separation. As a result of the Separation, we divested net assets of $260.4 million, which includes the $25.0 million cash distribution to AOUT.
The results of AOUT were previously reported in our Outdoor Products & Accessories segment. The historical financial data of the outdoor products and accessories business through August 23, 2020 is recorded as discontinued operations in income/(loss) from discontinued operations in the condensed consolidated financial statements. For the three months ended January 31, 2021 and 2020, income from discontinued operations, net of tax was $127,000 and $1.5 million, respectively. For the nine months ended January 31, 2021 and 2020, income/(loss) from discontinued operations, net of tax was $8.3 million and ($1.8) million, respectively.
In connection with the Separation, we entered into several agreements with AOUT that govern the relationship of the parties following the Separation, including the Separation and Distribution Agreement, the Tax Matters Agreement, the Transition Services Agreement, and the Employee Matters Agreement. Under the terms of the Transition Services Agreement, both companies agreed to provide each other certain transitional services, including information technology, information management, human resources, employee benefits administration, facilities, and other limited finance and accounting related services, for periods up to 24 months. Payments and operating expense reimbursements for transition services are recorded accordingly in our condensed consolidated financial statements based on the service provided.
The following table summarizes the major line items for the outdoor products and accessories business that are included in income/(loss) from discontinued operations, net of tax, in the condensed consolidation statements of income/(loss) and comprehensive income/(loss):
|
|
For the Three Months Ended January 31,
|
|
For the Nine Months Ended January 31,
|
|
|
|
2021
|
|
|
2020
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Net revenues
|
|
$
|
—
|
|
|
$
|
39,279
|
|
$
|
61,249
|
|
|
$
|
108,178
|
|
Cost of sales
|
|
|
—
|
|
|
|
19,763
|
|
|
27,147
|
|
|
|
58,402
|
|
Operating expenses
|
|
|
—
|
|
|
|
17,420
|
|
|
23,458
|
|
|
|
52,175
|
|
Interest (expense)/income, net
|
|
|
(6
|
)
|
|
|
—
|
|
|
(6
|
)
|
|
|
21
|
|
Other income/(expense), net
|
|
|
—
|
|
|
|
(7
|
)
|
|
118
|
|
|
|
(7
|
)
|
(Loss)/income from discontinued operations before
income taxes
|
|
$
|
(6
|
)
|
|
$
|
2,089
|
|
$
|
10,756
|
|
|
$
|
(2,385
|
)
|
Income tax (benefit)/expense
|
|
|
(133
|
)
|
|
|
585
|
|
|
2,422
|
|
|
|
(546
|
)
|
Income/(loss) from discontinued operations, net of tax
|
|
$
|
127
|
|
|
$
|
1,504
|
|
$
|
8,334
|
|
|
$
|
(1,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:
|
|
As of:
|
|
|
|
January 31, 2021
|
|
|
April 30, 2020
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
387
|
|
Accounts receivable, net
|
|
—
|
|
|
|
32,554
|
|
Inventories
|
|
—
|
|
|
|
60,450
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
|
1,282
|
|
Property, plant, and equipment, net
|
|
—
|
|
|
|
9,678
|
|
Intangible assets, net
|
|
—
|
|
|
|
69,379
|
|
Goodwill
|
|
—
|
|
|
|
64,581
|
|
Deferred income taxes
|
|
—
|
|
|
|
2,950
|
|
Other assets
|
|
—
|
|
|
|
1,897
|
|
Total assets of discontinued operations
|
|
$
|
—
|
|
|
$
|
243,158
|
|
Current liabilities
|
|
$
|
—
|
|
|
$
|
17,372
|
|
Other non-current liabilities
|
|
|
—
|
|
|
|
2,299
|
|
Total liabilities of discontinued operations
|
|
$
|
—
|
|
|
$
|
19,671
|
|
(4) Leases:
We lease certain of our real estate, machinery, equipment, and vehicles under non-cancelable operating lease agreements.
We recognize expenses under our operating lease assets and liabilities at the commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit interest rate. We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our lease agreements do not require material variable lease payments, residual value guarantees, or restrictive covenants. For operating leases, we recognize expense on a straight-line basis over the lease term. We record tenant improvement allowances as an offsetting adjustment included in our calculation of the respective right-of-use asset.
Many of our leases include renewal options that enable us to extend the lease term. The execution of those renewal options is at our sole discretion and are reflected in the lease term when they are reasonably certain to be exercised. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
11
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
The amounts of assets and liabilities related to our operating and financing leases as of January 31, 2021 were as follows (in thousands):
|
|
Balance Sheet Caption
|
|
January 31, 2021
|
|
Operating Leases
|
|
|
|
|
|
|
Right-of-use assets
|
|
|
|
$
|
7,273
|
|
Accumulated amortization
|
|
|
|
|
(2,183
|
)
|
Right-of-use assets, net
|
|
Other assets
|
|
$
|
5,090
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
Accrued expenses and deferred revenue
|
|
$
|
1,319
|
|
Non-current liabilities
|
|
Other non-current liabilities
|
|
|
3,951
|
|
Total operating lease liabilities
|
|
|
|
$
|
5,270
|
|
Finance Leases
|
|
|
|
|
|
|
Right-of-use assets
|
|
|
|
$
|
40,986
|
|
Accumulated depreciation
|
|
|
|
|
(3,706
|
)
|
Right-of-use assets, net
|
|
Property, plant, and equipment, net
|
|
$
|
37,280
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
Accrued expenses and deferred revenue
|
|
|
1,073
|
|
Non-current liabilities
|
|
Finance lease payable, net of current portion
|
|
|
39,060
|
|
Total finance lease liabilities
|
|
|
|
$
|
40,133
|
|
For the three months ended January 31, 2021, we recorded $420,000 of operating lease costs, of which $38,000 related to short-term leases that were not recorded as right-of-use assets. We recorded $525,000 of financing lease amortization and $504,000 of financing lease interest expense for the three months ended January 31, 2021. For the nine months ended January 31, 2021, we recorded $1.3 million of operating lease costs, of which $168,000 related to short-term leases that were not recorded as right-of-use assets. We recorded $1.6 million of financing lease amortization and $1.5 million of financing lease interest expense for the nine months ended January 31, 2021. As of January 31, 2021, our weighted average lease term and weighted average discount rate for our operating leases was 4.3 years and 4.5%, respectively. As of January 31, 2021, our weighted average lease term and weighted average discount rate for our financing leases were 17.7 years and 5.0%, respectively, and consisted primarily of our national logistics facility located in Columbia, Missouri. The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight-line basis over the life of the lease.
With the completion of the Separation, we entered into a sublease whereby AOUT subleases from us 59.0% of our national logistics facility under the same terms as the master lease. For the nine months ended January 31, 2021, 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/(loss) and comprehensive income/(loss).
Future lease payments for all our operating and finance leases for succeeding fiscal years is as follows (in thousands):
|
|
|
|
Operating
|
|
|
Financing
|
|
|
Total
|
|
2021
|
|
|
|
$
|
413
|
|
|
$
|
761
|
|
|
$
|
1,174
|
|
2022
|
|
|
|
|
1,546
|
|
|
|
3,056
|
|
|
|
4,602
|
|
2023
|
|
|
|
|
1,554
|
|
|
|
3,071
|
|
|
|
4,625
|
|
2024
|
|
|
|
|
1,545
|
|
|
|
3,125
|
|
|
|
4,670
|
|
2025
|
|
|
|
|
326
|
|
|
|
3,180
|
|
|
|
3,506
|
|
Thereafter
|
|
|
|
|
712
|
|
|
|
48,783
|
|
|
|
49,495
|
|
Total future lease payments
|
|
|
|
|
6,096
|
|
|
|
61,976
|
|
|
|
68,072
|
|
Less amounts representing interest
|
|
|
|
|
(826
|
)
|
|
|
(21,843
|
)
|
|
|
(22,669
|
)
|
Present value of lease payments
|
|
|
|
|
5,270
|
|
|
|
40,133
|
|
|
|
45,403
|
|
Less current maturities of lease liabilities
|
|
|
|
|
(1,319
|
)
|
|
|
(1,073
|
)
|
|
|
(2,392
|
)
|
Long-term maturities of lease liabilities
|
|
|
|
$
|
3,951
|
|
|
$
|
39,060
|
|
|
$
|
43,011
|
|
12
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
For the three and nine months ended January 31, 2021, the cash paid for amounts included in the measurement of the liabilities and the operating cash flows was $1.1 million and $3.6 million, respectively.
(5) Intangible Assets:
The following table presents a summary of intangible assets as of January 31, 2021 and April 30, 2020 (in thousands):
|
|
January 31, 2021
|
|
|
April 30, 2020
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Customer relationships
|
|
$
|
2,580
|
|
|
$
|
(2,041
|
)
|
|
$
|
539
|
|
|
$
|
2,580
|
|
|
$
|
(1,932
|
)
|
|
$
|
648
|
|
Developed technology
|
|
|
200
|
|
|
|
(194
|
)
|
|
|
6
|
|
|
|
200
|
|
|
|
(176
|
)
|
|
|
24
|
|
Patents, trademarks, and trade names
|
|
|
8,242
|
|
|
|
(5,367
|
)
|
|
|
2,875
|
|
|
|
8,140
|
|
|
|
(5,091
|
)
|
|
|
3,049
|
|
|
|
|
11,022
|
|
|
|
(7,602
|
)
|
|
|
3,420
|
|
|
|
10,920
|
|
|
|
(7,199
|
)
|
|
|
3,721
|
|
Patents in progress
|
|
|
1,016
|
|
|
|
—
|
|
|
|
1,016
|
|
|
|
654
|
|
|
|
—
|
|
|
|
654
|
|
Total definite-lived intangible assets
|
|
$
|
12,038
|
|
|
$
|
(7,602
|
)
|
|
$
|
4,436
|
|
|
$
|
11,574
|
|
|
$
|
(7,199
|
)
|
|
$
|
4,375
|
|
We amortize intangible assets with determinable lives over a weighted-average period of approximately five years. The weighted-average periods of amortization by intangible asset class is approximately five years for customer relationships; six years for developed technology; and five years for patents, trademarks, and trade names. Amortization expense, excluding amortization of deferred financing costs, amounted to $135,000 and $86,000 for the three months ended January 31, 2021 and 2020, respectively. Amortization expense, excluding amortization of deferred financing costs, amounted to $403,000 and $413,000 for the nine months ended January 31, 2021 and 2020, respectively.
Estimated amortization expense of intangible assets for the remainder of fiscal 2021 and succeeding fiscal years is as follows (in thousands):
Fiscal
|
|
Amount
|
|
2021
|
|
$
|
134
|
|
2022
|
|
|
495
|
|
2023
|
|
|
454
|
|
2024
|
|
|
445
|
|
2025
|
|
|
434
|
|
Thereafter
|
|
|
1,458
|
|
Total
|
|
$
|
3,420
|
|
(6) Notes, Loans Payable, and Financing Arrangements:
Credit Facilities — On August 24, 2020, we and certain of our direct and indirect Domestic Subsidiaries entered into an amended and restated credit agreement, or the Amended and Restated Credit Agreement, with certain lenders; including TD Bank, N.A., as administrative agent; TD Securities (USA) LLC and Regions Bank, as joint lead arrangers and joint bookrunners; and Regions Bank, as syndication agent. The Amended and Restated Credit Agreement amended and restated that certain Credit Agreement, dated as of June 15, 2015, by and among us, certain of our direct and indirect Domestic Subsidiaries, the lenders party thereto, and TD Bank, N.A., as administrative agent and swingline lender, as previously amended. The Amended and Restated Credit Agreement is currently unsecured; however, should any Springing Lien Trigger Event (as defined in the Amended and Restated Credit Agreement) occur, we and certain of our direct and indirect Domestic Subsidiaries 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 a legal, valid, and enforceable first priority Lien on the Collateral described therein.
The Amended and Restated Credit Agreement provides for a revolving line of credit of $100.0 million at any one time, or the Revolving Line. The Revolving Line bears interest at either the Base Rate or LIBOR rate, plus an applicable margin based on our consolidated leverage ratio. The Amended and Restated 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 (as defined in the Amended and Restated Credit Agreement) bears interest at the Base Rate, plus an applicable margin based on our consolidated leverage ratio.
13
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
Subject to the satisfaction of certain terms and conditions described in the Amended and Restated 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 Amended and Restated Credit Agreement.
As of January 31, 2021, we did not have any borrowings outstanding on the Revolving Line. Had there been borrowings, they would have borne an interest rate of 1.63%, which is equal to the LIBOR rate plus an applicable margin.
The Amended and Restated Credit Agreement contains customary limitations, including limitations on indebtedness, liens, fundamental changes to business or organizational structure, investments, loans, advances, guarantees, and acquisitions, asset sales, dividends, stock repurchases, stock redemptions, and the redemption or prepayment of other debt, and transactions with affiliates. We are also subject to financial covenants, including a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio.
Letters of Credit – At January 31, 2021, we had outstanding letters of credit aggregating $2.7 million, which included a $1.5 million letter of credit to collateralize our captive insurance company.
(7) Fair Value Measurement:
We follow the provisions of ASC 820-10, Fair Value Measurements and Disclosures Topic, or ASC 820-10, for our financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
Financial assets and liabilities recorded on the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities).
Our cash and cash equivalents, which are measured at fair value on a recurring basis, totaled $59.7 million and $125.0 million as of January 31, 2021 and April 30, 2020, respectively. We utilized Level 1 of the value hierarchy to determine the fair values of these assets.
Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:
|
•
|
quoted prices for identical or similar assets or liabilities in non-active markets (such as corporate and municipal bonds which trade infrequently);
|
|
•
|
inputs other than quoted prices that are observable for substantially the full term of the asset or liability (such as interest rate and currency swaps); and
|
|
•
|
inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (such as certain securities and derivatives).
|
Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our assumptions about the assumptions a market participant would use in pricing the asset or liability.
We currently do not have any Level 2 or Level 3 financial assets or liabilities as of January 31, 2021.
14
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
(8) Inventories:
The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or net realizable value, as of January 31, 2021 and April 30, 2020 (in thousands):
|
|
January 31, 2021
|
|
|
April 30, 2020
|
|
Finished goods
|
|
$
|
23,732
|
|
|
$
|
60,400
|
|
Finished parts
|
|
|
44,930
|
|
|
|
29,619
|
|
Work in process
|
|
|
8,021
|
|
|
|
6,787
|
|
Raw material
|
|
|
7,763
|
|
|
|
6,935
|
|
Total inventories
|
|
$
|
84,446
|
|
|
$
|
103,741
|
|
(9) Accrued Expenses and Deferred Revenue:
The following table sets forth other accrued expenses as of January 31, 2021 and April 30, 2020 (in thousands):
|
|
January 31, 2021
|
|
|
April 30, 2020
|
|
Accrued taxes other than income (a)
|
|
$
|
10,758
|
|
|
$
|
21,256
|
|
Deferred revenue (b)
|
|
|
5,048
|
|
|
|
14,744
|
|
Accrued employee benefits
|
|
|
4,753
|
|
|
|
4,407
|
|
Accrued distributor incentives
|
|
|
4,532
|
|
|
|
2,253
|
|
Accrued rebates and promotions
|
|
|
4,125
|
|
|
|
3,335
|
|
Accrued other
|
|
|
3,678
|
|
|
|
5,456
|
|
Accrued professional fees
|
|
|
2,519
|
|
|
|
3,675
|
|
Current portion of operating lease obligation
|
|
|
1,319
|
|
|
|
1,506
|
|
Current portion of finance lease obligation
|
|
|
1,073
|
|
|
|
1,046
|
|
Total accrued expenses and deferred revenue
|
|
$
|
37,805
|
|
|
$
|
57,678
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Decrease in accrued taxes other than income is due to the deferral of federal excise tax payments allowed by the Tax and Trade Bureau as a result of the COVID-19 pandemic as of April 30, 2020.
|
|
(b)
|
Decrease in deferred revenue due to the fulfillment of performance obligations related to promotional activity.
|
15
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
(10) Stockholders’ Equity:
Treasury Stock
On December 15, 2020, our board of directors authorized the repurchase of up to $50.0 million of our common stock, subject to certain conditions, in the open market or in privately negotiated transactions until December 14, 2021. As of January 31, 2021, we completed this stock repurchase program by repurchasing 2,737,489 shares of our common stock for $50.0 million utilizing cash on hand.
On March 2, 2021, our Board of Directors approved a program to repurchase up to $100.0 million of our outstanding shares of common stock through March 1, 2022. The amount and timing of any repurchases will depend on a number of factors, including price, trading volume, general market conditions, legal requirements, and other factors. The repurchases may be made on the open market, in block trades, or in privately negotiated transactions. Any shares of common stock repurchased under the program will be considered issued but not outstanding shares of our common stock.
Earnings/(loss) per Share
The following table provides a reconciliation of the net income amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the three and nine months ended January 31, 2021 and 2020 (in thousands, except per share data):
|
|
For the Three Months Ended
January 31,
|
|
|
For the Nine Months Ended
January 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
62,263
|
|
|
$
|
4,227
|
|
|
$
|
154,679
|
|
|
$
|
6,755
|
|
Income/(loss) from discontinued operations
|
|
|
127
|
|
|
|
1,504
|
|
|
|
8,334
|
|
|
|
(1,839
|
)
|
Net income
|
|
$
|
62,390
|
|
|
$
|
5,731
|
|
|
$
|
163,013
|
|
|
$
|
4,916
|
|
Weighted average shares outstanding — Basic
|
|
|
55,137
|
|
|
|
55,064
|
|
|
|
55,515
|
|
|
|
54,919
|
|
Effect of dilutive stock awards
|
|
|
565
|
|
|
|
680
|
|
|
|
743
|
|
|
722
|
|
Weighted average shares outstanding — Diluted
|
|
|
55,702
|
|
|
|
55,744
|
|
|
|
56,258
|
|
|
|
55,641
|
|
Earnings/(loss) per share — Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.13
|
|
|
$
|
0.08
|
|
|
$
|
2.79
|
|
|
$
|
0.12
|
|
Income/(loss) from discontinued operations
|
|
—
|
|
|
$
|
0.02
|
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
Net income
|
|
$
|
1.13
|
|
|
$
|
0.10
|
|
|
$
|
2.94
|
|
|
$
|
0.09
|
|
Earnings/(loss) per share — Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.12
|
|
|
$
|
0.08
|
|
|
$
|
2.75
|
|
|
$
|
0.12
|
|
Income/(loss) from discontinued operations
|
|
—
|
|
|
$
|
0.02
|
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
Net income
|
|
$
|
1.12
|
|
|
$
|
0.10
|
|
|
$
|
2.90
|
|
|
$
|
0.09
|
|
For the three months ended January 31, 2021 and 2020, the amount of shares excluded from the computation of diluted earnings per share was 14,994 and 20,664, respectively, because the effect would be antidilutive. For the nine months ended January 31, 2021 and 2020, the amount of shares we excluded from the computation of diluted earnings was 16,724 and 24,843, respectively, because the effect would be antidilutive.
Incentive Stock and Employee Stock Purchase Plans
We have two incentive stock plans: the 2004 Incentive Stock Plan and the 2013 Incentive Stock Plan. New grants under the 2004 Incentive Stock Plan have not been made since the approval of the 2013 Incentive Stock Plan at our 2013 Annual Meeting of Stockholders. All new grants covering all participants are issued under the 2013 Incentive Stock Plan. Except in specific circumstances, grants vest over a period of four years, and stock options are exercisable for a period of 10 years from the date of grant. The 2013 Incentive Stock Plan also permits the grant of awards to non-employees, which our board of directors has authorized in the past.
16
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
The number of shares and weighted average exercise prices of stock options for the nine months ended January 31, 2021 and 2020 were as follows:
|
|
For the Nine Months Ended January 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
Options outstanding, beginning of year
|
|
|
200,667
|
|
|
$
|
7.67
|
|
|
|
267,761
|
|
|
$
|
6.76
|
|
Exercised during the period
|
|
|
(200,667
|
)
|
|
|
7.67
|
|
|
|
(15,000
|
)
|
|
|
5.79
|
|
Canceled/forfeited during period
|
|
—
|
|
|
—
|
|
|
|
(160,667
|
)
|
|
|
8.89
|
|
Options outstanding, end of period
|
|
—
|
|
|
—
|
|
|
|
92,094
|
|
|
$
|
3.22
|
|
Weighted average remaining contractual life
|
|
—
|
|
|
|
|
|
|
0.45 years
|
|
|
|
|
|
Options exercisable, end of period
|
|
—
|
|
|
—
|
|
|
|
92,094
|
|
|
$
|
3.22
|
|
Weighted average remaining contractual life
|
|
—
|
|
|
|
|
|
|
0.45 years
|
|
|
|
|
|
There were no outstanding stock options as of January 31, 2021. The aggregate intrinsic value of outstanding and exercisable stock options as of January 31, 2020 was $571,000. The aggregate intrinsic value of stock options exercised in the three and nine months ended January 31, 2021 was $151,000 and $2.9 million, respectively. The aggregate intrinsic value of stock options exercised in the three and nine months ended January 31, 2020 was $100,000. At January 31, 2021 and 2020, there was no unrecognized compensation expense related to outstanding stock options.
We have an Employee Stock Purchase Plan, or the ESPP, in which each participant is granted an option to purchase our common stock on each subsequent exercise date during the offering period (as such terms are defined in the ESPP) in accordance with the terms of the ESPP.
The total stock-based compensation expense, including stock options, purchases under our ESPP, restricted stock units, or RSUs, and performance-based RSUs, or PSUs, was $3.4 million and $941,000 for the nine months ended January 31, 2021 and 2020, respectively. Stock-based compensation expense is included in cost of sales, sales and marketing, research and development, and general and administrative expenses.
We grant service-based RSUs to employees and members of our Board of Directors. The awards are made at no cost to the recipient. An RSU represents the right to receive one share of our common stock and does not carry voting or dividend rights. Except in specific circumstances, RSU grants to employees vest over a period of four years with one-fourth of the units vesting on each anniversary of the grant date. We amortize the aggregate fair value of our RSU grants to compensation expense over the vesting period.
We grant PSUs to our executive officers and certain management employees who are not executive officers. The PSUs vest, and the fair value of such PSUs will be recognized, over the corresponding three-year performance period.
During the nine months ended January 31, 2021, we granted an aggregate of 234,007 service-based RSUs, including 139,976 RSUs to non-executive officer employees, and 25,570 RSUs to our directors. During the nine months ended January 31, 2021, we granted 36,308 PSUs to certain of our executive officers. Compensation expense related to grants of RSUs and PSUs was $2.6 million for the nine months ended January 31, 2021. During the nine months ended January 31, 2021, we cancelled 92,500 PSUs as a result of the failure to satisfy the performance metric and 88,219 service-based RSUs as a result of the service condition not being met. In connection with the vesting of RSUs, during the nine months ended January 31, 2021, we delivered common stock to our employees and directors, including our executive officers, with a total market value of $7.0 million.
During the nine months ended January 31, 2020, we granted an aggregate of 255,911 service-based RSUs, including 140,271 RSUs to non-executive officer employees, and 115,640 to our directors. Compensation expense related to grants of RSUs and PSUs was $789,000 for the nine months ended January 31, 2020. During the nine months ended January 31, 2020, we cancelled 210,300 PSUs as a result of the service condition not being met, 156,725 PSUs as a result of failure to satisfy the performance metric, and 236,319 service-based RSUs as a result of the service condition not being met. In connection with the vesting of RSUs, during the nine months ended January 31, 2020, we delivered common stock to our employees and directors, including our executive officers, with a total market value of $2.2 million.
17
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
A summary of activity for unvested RSUs and PSUs for the nine months ended January 31, 2021 and 2020 is as follows:
|
|
For the Nine Months Ended January 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
Total # of
|
|
|
Average
|
|
|
Total # of
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Stock Units
|
|
|
Fair Value
|
|
|
Stock Units
|
|
|
Fair Value
|
|
RSUs and PSUs outstanding, beginning of period
|
|
|
1,313,974
|
|
|
$
|
11.65
|
|
|
|
1,631,631
|
|
|
$
|
15.44
|
|
Awarded
|
|
|
270,315
|
|
|
|
16.54
|
|
|
|
255,911
|
|
|
|
7.55
|
|
Vested
|
|
|
(404,608
|
)
|
|
|
14.61
|
|
|
|
(249,408
|
)
|
|
|
17.53
|
|
Forfeited
|
|
|
(180,719
|
)
|
|
|
15.19
|
|
|
|
(603,344
|
)
|
|
|
15.40
|
|
RSUs and PSUs outstanding, end of period
|
|
|
998,962
|
|
|
$
|
11.13
|
|
|
|
1,034,790
|
|
|
$
|
13.01
|
|
As of January 31, 2021, there was $4.0 million of unrecognized compensation expense related to unvested RSUs and PSUs. This expense is expected to be recognized over a weighted average remaining contractual term of 1.4 years.
(11) Commitments and Contingencies:
Litigation
In January 2018, Gemini Technologies, Incorporated, or Gemini, commenced an action against us in the U.S. District Court for the District of Idaho, or the District Court. The complaint alleges, among other things, that we breached the earn-out and other provisions of the Asset Purchase Agreement and ancillary agreements between the parties in connection with our acquisition of the Gemtech business from Gemini. The complaint seeks a declaratory judgment interpreting various terms of the Asset Purchase Agreement and damages in the sum of $18.6 million. In May 2018, the District Court dismissed the complaint on the grounds of forum non conveniens. In June 2018, Gemini appealed the decision dismissing its complaint to the U.S. Court of Appeals for the Ninth Circuit, or the Ninth Circuit. On July 24, 2019, the Ninth Circuit reversed the dismissal and remanded the case to the District Court to perform a traditional forum non conveniens analysis. On September 6, 2019, the parties stipulated that they do not contest that the venue is proper in the District of Idaho. On November 4, 2019, we filed an answer to Gemini’s complaint and a counterclaim against Gemini and its stockholders at the time of the signing of the Asset Purchase Agreement. Plaintiffs amended their complaint to add a claim of fraud in the inducement. We believe the claims asserted in the complaint have no merit, and we intend to aggressively defend this action.
We are a defendant in four product liability cases and are aware of two other product liability claims, primarily alleging defective product design, defective manufacturing, or failure to provide adequate warnings. In addition, we are a co-defendant in a case filed on August 27, 1999 by the city of Gary, Indiana, or the City, against numerous firearm manufacturers, distributors, and dealers seeking to recover monetary damages, as well as injunctive relief, allegedly arising out of the misuse of firearms by third parties. In January 2018, the trial court granted defendants’ Motion for Judgment on the Pleadings, dismissing the case in its entirety. In February 2018, plaintiffs appealed the dismissal to the Indiana Court of Appeals. On May 23, 2019, the Indiana Court of Appeals issued a decision, which affirmed in part and reversed in part and remanded for further proceedings, the trial court’s dismissal of the City’s complaint. On July 8, 2019, defendants filed a Petition to Transfer jurisdiction to the Indiana Supreme Court. Briefing was completed in the Indiana Supreme Court on August 5, 2019. On November 26, 2019, the Indiana Supreme Court denied our petition to transfer. The case was returned to the trial court.
In August 2019, Primus Group, LLC filed an action in the U.S. District Court for the Southern District of Ohio Eastern Division against us and other firearm manufacturers, alleging Racketeer Influenced Corrupt Organizations Act (RICO) violations, racketeering enterprise, and intentional misrepresentation. Plaintiff, which operates as an “entertainment venue” in Columbus, Ohio, purports to bring this action on behalf of “all persons entitled to freely attend schools, shopping locations, churches, entertainment venues, and workplaces in the United States without the intrusion of individuals armed with assault weapons.” In addition to compensatory and punitive damages, plaintiff seeks preliminary and permanent injunctive relief enjoining the distribution and sale of “assault weapons.” On August 20, 2019, the court denied without prejudice plaintiff’s Motion for Temporary Restraining Order. On September 3, 2019, defendants moved to dismiss plaintiff’s complaint. On September 16, 2019, plaintiff filed an amended complaint, adding claims of public nuisance, negligent design, and failure to warn. On October 9, 2019, the U.S. District Court granted defendants’ motion, dismissing the case in its entirety. On October 11, 2019, plaintiff filed a notice of appeal with the U.S. Court of Appeals for the Sixth
18
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
Circuit, or the Sixth Circuit. On November 1, 2019, the Sixth Circuit dismissed plaintiff’s appeal for failure to pay the required fee. On November 4, 2019, plaintiff-appellant filed, and the Sixth Circuit granted, a motion to reinstate the case. However, on March 13, 2020, at the request of the Appellant and based on the death of co-counsel, the Sixth Circuit held the case in abeyance and ordered that the Appellant file a status report every 30 days. On April 14, 2020, the Appellant filed a Status Report stating that it intended to reactivate the case or dismiss the appeal within 60 days. On October 21, 2020, the Appellant filed its opening brief with the Sixth Circuit. The Appellees filed their reply brief on November 18, 2020. On February 8, 2021, the Sixth Circuit affirmed the trials court’s dismissal of the case.
In May 2018, we were named in an action related to the Parkland, Florida shooting, filed in the Circuit Court, Broward County, Florida, seeking a declaratory judgment that a Florida statute that provides firearm manufacturers and dealers immunity from liability when their legally manufactured and lawfully sold firearms are later used in criminal acts only applies to civil actions commenced by governmental agencies not private litigants. In August 2018, we moved to dismiss the complaint on the grounds that it seeks an impermissible advisory opinion. On December 6, 2018, the court granted defendants’ motion to dismiss without prejudice and granted plaintiffs leave to amend their complaint. On December 10, 2018, plaintiffs filed a Second Amended Complaint for Declaratory Relief. On December 13, 2018, defendants filed a Motion to Dismiss Plaintiffs’ Second Amended Complaint. On November 21, 2019, the court granted defendants’ motion to dismiss plaintiffs’ second amended complaint, with prejudice. On August 27, 2020, the plaintiffs filed a Motion for Entry of Final and Appealable Order. We opposed, and on November 4, 2020, the court issued an order denying plaintiffs’ motion. On November 13, 2020, the plaintiffs filed a Notice of Appeal. On November 18, 2020, the Fourth District Court of Appeal of the State of Florida, or the Court of Appeal, issued an order requiring plaintiffs to file a brief explaining the basis for the court’s jurisdiction and how their appeal is timely given the order rendered November 22, 2019. On November 25, 2020, plaintiffs-appellants filed a jurisdictional brief. On December 7, 2020, we filed our response, incorporating a motion to dismiss. On December 28, 2020, the Court of Appeal denied our motion to dismiss, and ordered that the case proceed as a Petition for Writ of Certiorari. On February 18, 2021, plaintiffs-petitioners filed their petition with the Court of Appeal.
We are a defendant in a putative class proceeding before the Ontario Superior Court of Justice in Toronto, Canada. The action was filed on December 16, 2019. The action claims CAD$50 million in aggregate general damages, CAD$100 million in aggregate punitive damages, special damages in an unspecified amount, together with interest and legal costs. The named plaintiffs are two victims of a shooting that took place in Toronto on July 22, 2018 and their family members. One victim was shot and injured during the shooting. The other suffered unspecified injuries while fleeing the shooting. The plaintiffs are seeking to certify a claim on behalf of classes that include all persons who were killed or injured in the shooting and their immediate family members. The plaintiffs allege negligent design and public nuisance. The case has not been certified as a class action. On July 13, 2020, we filed a Notice of Motion for an order striking the claim and dismissing the action in its entirety. On February 11, 2021, the court granted our motion in part and denied it in part. We intend to file a motion for leave to appeal the court’s decision.
In May 2020, we were named in an action related to the Chabad of Poway synagogue shooting that took place on April 27, 2019. The complaint was filed in the Superior Court of the State of California, for the County of San Diego – Central, and asserts claims against us for product liability, unfair competition, negligence, and public nuisance. The plaintiffs allege they were present at the synagogue on the day of the incident and suffered physical and/or emotional injury. The plaintiffs seek compensatory and punitive damages, attorneys’ fees, and injunctive relief. On September 3, 2020, we filed a demurrer and motion to strike, seeking to dismiss plaintiffs’ complaint. The plaintiffs filed an opposition to our motion on December 18, 2020. Our reply to plaintiffs’ opposition was filed on January 15, 2021. On January 14, 2021, the court granted the application of several law professors who sought leave to file an amicus brief in support of our demurrer. Plaintiffs have an opportunity to file an amicus to respond to the law professors’ brief. The hearing on our motion was rescheduled to June 8, 2021.
We believe that the various allegations as described above are unfounded, and, in addition, that any incident and any results from them or any injuries were due to negligence or misuse of the firearm by the claimant or a third party.
John Pidcock, as trustee of the ASPC Creditor Trust (appointed under the plan of reorganization of AcuSport Corp., or AcuSport, as debtor in possession under chapter 11 of the U.S. Bankruptcy Code), is the plaintiff in two separate actions against us in the U.S. Bankruptcy Court for the Southern District of Ohio. The first seeks recovery of alleged preferential transfers received by us from AcuSport in the aggregate amount of $4.2 million. The second seeks turnover of goods allegedly owed to AcuSport by us under one or more of our promotional programs in the amount of $1.5 million. We have filed answers to both complaints denying all material allegations and asserting affirmative defenses. Mediation was held on December 10, 2020, and was unsuccessful in resolving these cases. We believe we have strong defenses to these actions and intend to continue to vigorously defend them.
19
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended January 31, 2021 and 2020
We believe that the various allegations as described above are unfounded.
In addition, from time to time, we are involved in lawsuits, claims, investigations, and proceedings, including commercial, environmental, premises and employment matters, which arise in the ordinary course of business.
The relief sought in individual cases primarily includes compensatory and, sometimes, punitive damages. Certain of the cases and claims seek unspecified compensatory or punitive damages. In others, compensatory damages sought may range from less than $75,000 to approximately $50.0 million. In our experience, initial demands do not generally bear a reasonable relationship to the facts and circumstances of a particular matter. We believe that our accruals for product liability cases and claims are a reasonable quantitative measure of the cost to us of product liability cases and claims.
We are vigorously defending ourselves in the lawsuits to which we are subject. An unfavorable outcome or prolonged litigation could harm our business. Litigation of this nature also is expensive, time consuming, and diverts the time and attention of our management.
We monitor the status of known claims and the related product liability accrual, which includes amounts for defense costs for asserted and unasserted claims. After consultation with litigation counsel and a review of the merit of each claim, we have concluded that we are unable to reasonably estimate the probability or the estimated range of reasonably possible losses related to material adverse judgments related to such claims and, therefore, we have not accrued for any such judgments. In the future, should we determine that a loss (or an additional loss in excess of our accrual) is at least reasonably possible and material, we would then disclose an estimate of the possible loss or range of loss, if such estimate could be made, or disclose that an estimate could not be made. We believe that we have provided adequate accruals for defense costs.
We have recorded our liability for defense costs before consideration for reimbursement from insurance carriers. We have also recorded the amount due as reimbursement under existing policies from the insurance carriers as a receivable shown in other current assets and other assets.
At this time, an estimated range of reasonably possible additional losses relating to unfavorable outcomes cannot be made.
(12) Subsequent Events:
Dividends
On March 2, 2021, our Board of Directors authorized a regular quarterly dividend for stockholders of $0.05 per share. The dividend will be for stockholders of record as of market close on March 17, 2021 and is payable on March 31, 2021.
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