Overview
Please refer to the Management’s Discussion and Analysis of Financial Condition
and Results of Operations in our Fiscal 2022 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.
Second Quarter Fiscal 2023 Highlights
Our operating results for the three months ended October 31, 2022 included the
following:
•
Net sales were $121.0 million, a decrease of $109.4 million, or 47.5%, from the
comparable quarter last year.
•
Gross margin was 32.4% compared with gross margin of 44.3% for the comparable
quarter last year.
•
Net income was $9.6 million, or $0.21 per diluted share, compared with net
income of $50.9 million, or $1.05 per diluted share, for the comparable quarter
last year.
Our operating results for the six months ended October 31, 2022 included the
following:
•
Net sales were $205.4 million, a decrease of $299.7 million, or 59.3%, from the
prior year comparable period.
•
Gross margin was 34.4% compared with gross margin of 45.9% for the prior year
comparable period.
•
Net income was $13.0 million, or $0.28 per diluted share, compared with net
income of $127.8 million, or $2.63 per diluted share, for the prior year
comparable period.
Results of Operations
Net Sales and Gross Profit – For the Three Months Ended October 31, 2022
The following table sets forth certain information regarding net sales and gross
profit for the three months ended October 31, 2022 and 2021 (dollars in
thousands):
2022 2021 $ Change % Change
Handguns $ 93,037$ 157,525$ (64,488 ) -40.9 %
Long Guns 16,999 60,320 (43,321 ) -71.8 %
Other Products & Services 10,999 12,634 (1,635 ) -12.9 %
Total net sales $ 121,035$ 230,479$ (109,444 ) -47.5 %
Cost of sales 81,773 128,484 (46,711 ) -36.4 %
Gross profit $ 39,262$ 101,995$ (62,733 ) -61.5 %
% of net sales (gross margin) 32.4 % 44.3 %
The following table sets forth certain information regarding firearm units
shipped by trade channel for the three months ended October 31, 2022 and 2021
(units in thousands):
Total Units Shipped 2022 2021 # Change % Change
Handguns 209 383 (174 ) -45.4%
Long Guns 31 109 (78 ) -71.6%
Sporting Goods Channel Units Shipped 2022 2021 # Change % Change
Handguns
191 360 (169 ) -46.9%
Long Guns 27 104 (77 ) -74.0%
Professional Channel Units Shipped 2022 2021 # Change % Change
Handguns 18 23 (5 ) -21.7%
Long Guns 4 5 (1 ) -20.0%
Sales of our handguns decreased $64.5 million, or 40.9%, from the comparable
quarter last year. The decrease in sales was primarily as a result of a return
to more normalized demand from the historic pandemic-related demand that lasted
from March 2020 through the beginning of fiscal 2022, partially offset by net
sales generated from increased shipments of new products. Handgun unit
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shipments into the sporting goods channel decreased by 46.9% from the comparable
quarter last year while overall consumer handgun demand decreased 7.0% (as
indicated by adjusted background checks reported in the National Instant
Criminal Background Check System, or NICS).
Sales of our long guns decreased $43.3 million, or 71.8%, from the comparable
quarter last year. Similar to handgun sales, this decrease was primarily a
result of lower demand for the majority of our long gun products. Long gun unit
shipments into our sporting goods channel decreased 74.0% from the comparable
quarter last year while overall consumer demand for long guns decreased 12.1%,
as indicated by NICS, reflecting strong continued consumer demand for certain
product categories in which we do not currently participate.
We believe that overall firearm demand remains healthy, as indicated by recent
adjusted NICS data, but has normalized from the surge levels we experienced
during much of calendar 2020 and 2021. We believe our comparable shipments year
over year underperformed in comparison to NICS primarily because of channel
inventory fluctuations. During the second quarter of fiscal 2022, our inventory
in the distribution channel grew significantly (by more than 50%) compared with
the second quarter of fiscal 2021. During the second quarter of this current
year, however, inventory in our distribution channel declined more than 10%
compared with the prior year comparable quarter, indicating that our channel
partners have continued to adjust inventory levels. We believe this resulted in
an outsized swing in our comparable quarterly financial results. Additionally,
we believe that our sales were negatively impacted by recent increased
aggressive promotional activity by many of our competitors and that the impact
of inflation on consumer purchase power resulted in a temporary shift toward
lower priced offerings.
Other products and services revenue decreased $1.6 million, or 12.9%, from the
comparable quarter last year, primarily because of decreased sales of component
parts and business-to-business services, partially offset by increased licensing
revenue.
New products, defined as any new SKU not shipped in the comparable quarter last
year, represented 25.0% of sales for the three months ended October 31, 2022 and
included four new pistols, one new modern sporting rifle, and many new product
line extensions.
Gross margin for the three months ended October 31, 2022 was 32.4% compared with
gross margin of 44.3% for the comparable quarter last year, primarily because of
a combination of reduced sales volumes across nearly all product lines, the
impact of inflation in both material costs and labor, unfavorable fixed-cost
absorption due to lower production volume, unfavorable product liability
adjustments, and unfavorable inventory valuation adjustments, partially offset
by decreased compensation costs.
Our inventory balances increased $59.8 million between April 30, 2022 and
October 31, 2022 as we replenished stock to provide our customers with a more
robust selection of inventory and positioned ourselves for potential increases
in consumer demand. 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 because of normal seasonality, but will remain elevated as we
begin our transition to our new facility in Tennessee.
Net Sales and Gross Profit – For the Six Months Ended October 31, 2022
The following table sets forth certain information regarding net sales and gross
profit for the six months ended October 31, 2022 and 2021 (dollars in
thousands):
2022 2021 $ Change % Change
Handguns $ 152,403$ 355,381$ (202,978 ) -57.1 %
Long Guns 31,105 128,012 (96,907 ) -75.7 %
Other Products & Services 21,921 21,695 226 1.0 %
Total net sales $ 205,429$ 505,088$ (299,659 ) -59.3 %
Cost of sales 134,696 273,151 (138,455 ) -50.7 %
Gross profit $ 70,733$ 231,937$ (161,204 ) -69.5 %
% of net sales (gross margin) 34.4 % 45.9 %
The following table sets forth certain information regarding firearm units
shipped by trade channel for the six months ended October 31, 2022 and 2021
(units in thousands):
Total Units Shipped 2022 2021 # Change % Change
Handguns 337 890 (553 ) -62.1%
Long Guns 58 246 (188 ) -76.4%
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Sporting Goods Channel Units Shipped 2022 2021 # Change % Change
Handguns
307 834 (527 ) -63.2%
Long Guns 51 235 (184 ) -78.3%
Professional Channel Units Shipped 2022 2021 # Change % Change
Handguns
30 56 (26 ) -46.4%
Long Guns 7 11 (4 ) -36.4%
Sales of our handguns decreased $203.0 million, or 57.1%, from the prior year
comparable period. The decrease in sales was primarily as a result of a return
to more normalized demand from the historic pandemic-related demand that lasted
from March 2020 through the beginning of fiscal 2022 and replenishment of
depleted channel inventory, partially offset by net sales generated from
increased shipments of new products. Handgun unit shipments into the sporting
goods channel decreased by 63.2% from the comparable quarter last year while
overall consumer handgun demand decreased 5.9% (as indicated by NICS).
Sales of our long guns decreased $96.9 million, or 75.7%, from the prior year
comparable period. Similar to handgun sales, this decrease was primarily as a
result of lower demand for the majority of our long gun products and
replenishment of channel inventory. Long gun unit shipments into our sporting
goods channel decreased 78.3% from the comparable quarter last year while
overall consumer demand for long guns decreased 8.7%, as indicated by NICS.
As noted above, fiscal 2022 included a period of inventory replenishment,
involving significant restocking from the near complete depletion of inventory
during the calendar 2020 and 2021 demand surge. This replenishment of inventory
within the distribution channel peaked in our fiscal third quarter and, since
that time, inventory levels have been declining, which has negatively impacted
our shipments. During our prior year first half, we saw inventory in our
distribution channel grow by more than 400%, while during the current first
half, inventory in our distribution channel declined by approximately 25%,
resulting in a significant impact on our comparable financial results.
Other products and services revenue increased $226,000, or 1.0%, over the prior
year comparable period, primarily because of increased sales of component parts,
business-to-business services, and handcuffs, partially offset by decreased
licensing revenue.
New products represented 23.5% of sales for the six months ended October 31,
2022 and included six new pistols, one new modern sporting rifle, and many new
product line extensions.
Gross margin for the six months ended October 31, 2022 was 34.4% compared with
gross margin of 45.9% for the comparable period last year, primarily because of
a combination of reduced sales volumes across nearly all product lines, the
impact of inflation in both material and labor costs, unfavorable fixed-cost
absorption due to lower production volume, expenses recorded related to employee
severance and relocation costs associated with the Relocation, and unfavorable
product liability adjustments, partially offset by decreased compensation costs
and favorable inventory valuation adjustments.
Operating Expenses
The following table sets forth certain information regarding operating expenses
for the three months ended October 31, 2022 and 2021 (dollars in thousands):
2022 2021 $ Change % Change
Research and development $ 1,869$ 1,744$ 125 7.2 %
Selling, marketing, and distribution 9,431 11,423 (1,992 ) -17.4 %
General and administrative 15,435 23,436 (8,001 ) -34.1 %
Total operating expenses $ 26,735$ 36,603$ (9,868 ) -27.0 %
% of net sales 22.1 % 15.9 %
Research and development expenses increased $125,000 over the prior year
comparable quarter, primarily because of new product development costs,
partially offset by decreased compensation-related costs, driven by temporarily
unfilled positions, which we believe were as a result of the Relocation.
Selling, marketing, and distribution expenses decreased $2.0 million, primarily
as a result of decreased co-op advertising expenses on lower sales, decreased
compensation-related expenses resulting from lower profit-related compensation
costs and temporarily unfilled positions, decreased digital advertising costs,
and decreased freight costs because of lower shipments, partially offset by
increased spending on targeted customer promotions and increased radio
advertising costs. General and administrative expenses decreased $8.0 million,
primarily because of lower costs associated with the Relocation, decreased
legal-related expenses, decreased profit sharing expense, decreased
compensation-related costs, driven by temporarily unfilled positions, which we
believe were as a result of the Relocation, as well as lower profit-related
compensation costs, and decreased bad debt expense.
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The following table sets forth certain information regarding operating expenses
for the six months ended October 31, 2022 and 2021 (dollars in thousands):
2022 2021 $ Change % Change
Research and development $ 3,542$ 3,552$ (10 ) -0.3 %
Selling, marketing, and distribution 17,458 22,057 (4,599 ) -20.9 %
General and administrative 33,288 41,049 (7,761 ) -18.9 %
Total operating expenses $ 54,288$ 66,658$ (12,370 ) -18.6 %
% of net sales 26.4 % 13.2 %
Research and development expenses were relatively flat compared with the prior
year comparable period, primarily because of decreased compensation-related
costs, partially offset by new product development costs. Selling, marketing,
and distribution expenses decreased $4.6 million, primarily as a result of
decreased compensation-related expenses, decreased co-op advertising expenses,
decreased digital advertising costs, and decreased freight costs due to lower
shipments, partially offset by increased costs associated with the Relocation,
increased spending on targeted customer promotions, and increased expenses
related to industry shows. General and administrative expenses decreased $7.8
million, primarily because of lower costs associated with the Relocation,
decreased profit sharing expense, decreased legal-related expenses, decreased
compensation-related costs, and decreased bad debt expense.
Operating Income
The following table sets forth certain information regarding operating income
for the three months ended October 31, 2022 and 2021 (dollars in thousands):
2022 2021 $ Change % Change
Operating income from operations $ 12,527$ 65,392$ (52,865 ) -80.8 %
% of net sales (operating margin) 10.3 % 28.4 %
Operating income for the three months ended October 31, 2022 decreased $52.9
million from the comparable quarter last year, primarily because of reduced
sales volumes across nearly all product lines, unfavorable fixed-cost
absorption, unfavorable product liability adjustments, unfavorable inventory
valuation adjustments, increased product development costs, and increased costs
on targeted customer promotions, partially offset by decreased co-op advertising
expenses, decreased compensation-related expenses, decreased digital advertising
costs, and decreased freight costs due to lower shipments.
The following table sets forth certain information regarding operating income
for the six months ended October 31, 2022 and 2021 (dollars in thousands):
2022 2021 $ Change % Change
Operating income from operations $ 16,445$ 165,279$ (148,834 ) -90.1 %
% of net sales (operating margin) 8.0 % 32.7 %
Operating income for the six months ended October 31, 2022 decreased $148.8
million from the prior year comparable period, primarily because of reduced
sales volumes across nearly all product lines, unfavorable fixed-cost
absorption, unfavorable product liability adjustments, increased product
development costs, and increased spending on targeted customer promotions,
partially offset by decreased co-op advertising expenses, decreased
compensation-related expenses, decreased digital advertising costs, decreased
freight costs due to lower shipments, decreased profit sharing expense, and
decreased legal-related expenses.
Income Taxes
The following table sets forth certain information regarding income tax expense
for the three months ended October 31, 2022 and 2021 (dollars in thousands):
2022 2021 $ Change % Change
Income tax expense $ 3,249$ 14,824$ (11,575 ) -78.1 %
% of income from operations (effective
tax rate) 25.2 % 22.5 % 2.6 %
Income tax expense decreased $11.6 million from the comparable quarter last year
as a result of lower operating income.
The following table sets forth certain information regarding income tax expense
for the six months ended October 31, 2022 and 2021 (dollars in thousands):
2022 2021 $ Change % Change
Income tax expense $ 4,094$ 37,944$ (33,850 ) -89.2 %
% of income from operations (effective
tax rate) 24.0 % 22.9 % 1.1 %
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Income tax expense decreased $33.9 million from the prior year comparable period
as a result of lower operating income.
Net Income
The following table sets forth certain information regarding net income and the
related per share data for the three months ended October 31, 2022 and 2021
(dollars in thousands, except per share data):
2022 2021 $ Change % Change
Income from operations $ 9,648$ 50,935$ (41,287 ) -81.1 %
Net income per share
Basic $ 0.21$ 1.06$ (0.85 ) -80.2 %
Diluted $ 0.21$ 1.05$ (0.84 ) -80.0 %
Net income for the three months ended October 31, 2022 was $9.6 million compared
with $50.9 million for the comparable quarter last year for the reasons outlined
above.
The following table sets forth certain information regarding net income and the
related per share data for the six months ended October 31, 2022 and 2021
(dollars in thousands, except per share data):
2022 2021 $ Change % Change
Income from operations $ 12,960$ 127,817$ (114,857 ) -89.9 %
Net income per share
Basic $ 0.28$ 2.65$ (2.37 ) -89.4 %
Diluted $ 0.28$ 2.63$ (2.35 ) -89.4 %
Net income for the six months ended October 31, 2022 was $13.0 million compared
with $127.8 million for the prior year comparable period 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 six months
ended October 31, 2022 and 2021 (dollars in thousands):
2022 2021 $ Change % Change
Operating activities $ (28,165 )$ 105,364$ (133,529 ) -126.7 %
Investing activities (39,590 ) (10,199 ) (29,391 ) -288.2 %
Financing activities (9,998 ) (48,791 ) 38,793 79.5 %
Total cash flow $ (77,753 )$ 46,374$ (124,127 ) -267.7 %
Operating Activities
On an annual basis, operating activities generally represent the principal
source of our cash flows. Cash used in operating activities was $28.2 million
for the six months ended October 31, 2022 compared with $105.4 million of cash
generated for the six months ended October 31, 2021. In addition to a $114.9
million reduction in net income, cash used in operating activities for the six
months ended October 31, 2022 was negatively impacted by an incremental $18.0
million increase in inventory resulting from lower sales volumes, payment of an
incremental $11.3 million in income taxes due to the timing of prior year tax
payments, an incremental $4.1 million smaller decrease in accounts receivable,
and an incremental $2.6 million increase in prepaid expenses and other current
assets. These unfavorable impacts were partially offset by an incremental $14.4
million increase in accounts payable and incremental $6.0 million increase in
accrued payroll and incentives due to accruals related to the Relocation.
Investing Activities
Cash used in investing activities increased $29.4 million for the six months
ended October 31, 2022 compared with the prior year comparable period. We paid
$39.4 million for capital expenditures for the six months ended October 31,
2022, $29.3 million higher than the prior year comparable period primarily due
to payments related to the Relocation. Excluding payments related to the
Relocation, we expect to spend between $20.0 million and $25.0 million on
capital expenditures in fiscal 2023, representing a decrease of $4.0 million to
an increase of nearly $1.0 million, as compared with $24.0 million in capital
expenditures in fiscal 2022. This is primarily
23
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due to lower expenditures related to capacity offset by expenditures related to
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 before
December 31, 2025. We expect to spend between $115.0 million and $120.0 million
on capital expenditures in fiscal 2023, of which $70.0 million to $75.0 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 ended October 31, 2022, we have incurred $39.8 million and paid $33.0
million for capital expenditures in connection with the Relocation, which was
net of $9.0 million in state and local incentives received during the period.
Financing Activities
Cash used in financing activities was $10.0 million for the six months ended
October 31, 2022 compared with $48.8 million for the six months ended October
31, 2021. Cash used in financing activities during the six months ended October
31, 2022 was primarily the result of $9.2 million in dividend distributions. For
the six months ended October 31, 2021, cash used in financing activities was
primarily the result of a $40.0 million treasury stock repurchase and $7.7
million in dividend distributions.
Finance Lease – We are a party to a $46.2 million lease for our Missouri
distribution facility, 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
ending October 31, 2022, we paid approximately $559,000 in principal payments
relating to this finance lease. With the completion of the Separation, we
entered into a sublease for 59.0% of this facility under the same terms as the
master lease. On July 16, 2022, we entered into an amendment to the sublease
agreement, increasing the subleased space to 64.7% of the facility under the
same terms as the master lease. For the six months ended October 31, 2022, 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 of October 31, 2022, we had no outstanding indebtedness.
However, we maintain the Revolving Line, 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 of October 31, 2022. 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. In the
event of a Springing Lien Triggering Event (as defined in the Amended and
Restated Credit Agreement), we would be required to enter into certain documents
that create in favor of the 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 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.
The Amended and Restated Credit Agreement contains financial covenants relating
to maintaining maximum leverage and minimum debt service coverage. We were in
compliance with all debt covenants as of October 31, 2022.
Share Repurchase Programs – On March 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 ended October 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. On June 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. For the six months ended October 31, 2022,
there were no purchases under this authorization; this authorization was
completed during fiscal 2022. There were no common stock purchases through the
six months ended October 31, 2022, nor were there any unfulfilled
authorizations.
Dividends – In March 2022, our Board of Directors authorized a regular quarterly
dividend for stockholders of $0.10 per share. The current dividend will be for
stockholders of record as of market close on December 20, 2022 and will be
payable on January 3, 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.
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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 October 31, 2022, we had $43.0 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 2022 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 2022 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.
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