NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
(1) Organization:
We are one of the world’s leading manufacturers and designers of firearms. We manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles), handcuffs, suppressors, and other firearm-related products for sale to a wide variety of customers, including firearm 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, and Gemtech brands. We manufacture our products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We store finished good inventory and fulfill customer orders from our distribution center in Columbia, Missouri. We also sell our manufacturing services to other businesses to attempt to level-load our factories. We sell those services under our Smith & Wesson and Smith & Wesson Precision Components brands. We plan to move our headquarters and significant elements of our operations to a new facility being constructed in Maryville, Tennessee. See Note 9 — Commitments and Contingencies, for more information regarding this plan.
(2) Basis of Presentation:
Interim Financial Information – The condensed consolidated balance sheet as of July 31, 2022, the condensed consolidated statements of income for the three months ended July 31, 2022 and 2021, the condensed consolidated statements of changes in stockholders’ equity for the three months ended July 31, 2022 and 2021, and the condensed consolidated statements of cash flows for the three months ended July 31, 2022 and 2021 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 for the three months ended July 31, 2022 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2022 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 Fiscal 2022 Form 10-K. The results of operations for the three months ended July 31, 2022 may not be indicative of the results that may be expected for the fiscal year ending April 30, 2023, or any other period.
(3) Leases:
We lease certain of our real estate, machinery, and equipment 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.
9
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
The amounts of assets and liabilities related to our operating and financing leases as of July 31, 2022 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Balance Sheet Caption |
|
July 31, 2022 |
|
Operating Leases |
|
|
|
|
|
Right-of-use assets |
|
|
|
$ |
7,297 |
|
Accumulated amortization |
|
|
|
|
(4,010 |
) |
Right-of-use assets, net |
|
Other assets |
|
$ |
3,287 |
|
|
|
|
|
|
|
Current liabilities |
|
Accrued expenses and deferred revenue |
|
$ |
1,613 |
|
Non-current liabilities |
|
Other non-current liabilities |
|
|
1,925 |
|
Total operating lease liabilities |
|
|
|
$ |
3,538 |
|
Finance Leases |
|
|
|
|
|
Right-of-use assets |
|
|
|
$ |
40,986 |
|
Accumulated depreciation |
|
|
|
|
(6,858 |
) |
Right-of-use assets, net |
|
Property, plant, and equipment, net |
|
$ |
34,128 |
|
|
|
|
|
|
|
Current liabilities |
|
Accrued expenses and deferred revenue |
|
$ |
1,186 |
|
Non-current liabilities |
|
Finance lease payable, net of current portion |
|
|
37,323 |
|
Total finance lease liabilities |
|
|
|
$ |
38,509 |
|
For the three months ended July 31, 2022, we recorded $446,000 of operating lease costs, of which $30,000 related to short-term leases that were not recorded as right-of-use assets. We recorded $523,000 of financing lease amortization and $484,000 of financing lease interest expense for the three months ended July 31, 2022. As of July 31, 2022, our weighted average lease term and weighted average discount rate for our operating leases were 3.0 years and 4.4%, respectively. As of July 31, 2022, our weighted average lease term and weighted average discount rate for our financing leases were 16.3 years and 5.0%, respectively, and consisted primarily of our Missouri distribution facility. 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 spin-off of our outdoor products and accessories business on August 24, 2020, or the Separation, we entered into a sublease whereby American Outdoor Brands, Inc., our former wholly owned subsidiary, or AOUT, subleases from us 59.0% of our Missouri distribution facility under the same terms as the master lease. On July 16, 2022, we entered into an amendment to the sublease agreement, increasing the leased space to 64.7% of the facility under the same terms as the master lease. For the three months ended July 31, 2022, we recorded $544,000 of income related to this sublease agreement, which was recorded in other income in our condensed consolidated statements of income.
The following table represents future expected undiscounted cashflows, based on the sublease agreement with AOUT, to be received on an annual basis for the next five years and thereafter, as of July 31, 2022 (in thousands):
|
|
|
|
|
Fiscal |
|
Amount |
|
2023 |
|
$ |
1,541 |
|
2024 |
|
|
2,086 |
|
2025 |
|
|
2,123 |
|
2026 |
|
|
2,160 |
|
2027 |
|
|
2,198 |
|
Thereafter |
|
|
28,658 |
|
Total future sublease receipts |
|
|
38,766 |
|
Less amounts representing interest |
|
|
(10,302 |
) |
Present value of sublease receipts |
|
$ |
28,464 |
|
10
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
Future lease payments for all our operating and finance leases for succeeding fiscal years is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Financing |
|
|
Total |
|
2023 |
|
|
|
$ |
1,332 |
|
|
$ |
2,310 |
|
|
$ |
3,642 |
|
2024 |
|
|
|
|
1,650 |
|
|
|
3,125 |
|
|
|
4,775 |
|
2025 |
|
|
|
|
324 |
|
|
|
3,180 |
|
|
|
3,504 |
|
2026 |
|
|
|
|
301 |
|
|
|
3,236 |
|
|
|
3,537 |
|
2027 |
|
|
|
|
272 |
|
|
|
3,292 |
|
|
|
3,564 |
|
Thereafter |
|
|
|
|
125 |
|
|
|
42,256 |
|
|
|
42,381 |
|
Total future lease payments |
|
|
|
|
4,004 |
|
|
|
57,399 |
|
|
|
61,403 |
|
Less amounts representing interest |
|
|
|
|
(466 |
) |
|
|
(18,890 |
) |
|
|
(19,356 |
) |
Present value of lease payments |
|
|
|
|
3,538 |
|
|
|
38,509 |
|
|
|
42,047 |
|
Less current maturities of lease liabilities |
|
|
|
|
(1,613 |
) |
|
|
(1,186 |
) |
|
|
(2,799 |
) |
Long-term maturities of lease liabilities |
|
|
|
$ |
1,925 |
|
|
$ |
37,323 |
|
|
$ |
39,248 |
|
For the three months ended July 31, 2022, the cash paid for amounts included in the measurement of the liabilities and the operating cash flows was $1.1 million.
(4) Notes, Loans Payable, and Financing Arrangements:
Credit Facilities — On August 24, 2020, we and certain of our 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 our former credit agreement dated as of June 15, 2015. 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 subsidiaries would be required to execute certain documents in favor of TD Bank, N.A. and the lenders party to such documents would have 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 (as defined in the Amended and Restated Credit Agreement) 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 Adjusted Consolidated Leverage Ratio (as defined in the Amended and Restated Credit Agreement). 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 (as defined in the Amended and Restated Credit Agreement) under the Amended and Restated Credit Agreement.
As of July 31, 2022, we did not have any borrowings outstanding on the Revolving Line. Had there been borrowings, they would have borne an interest rate of 3.59%, 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. As of July 31, 2022, we were compliant with all required financial covenants.
Letters of Credit — At July 31, 2022, we had outstanding letters of credit aggregating $2.6 million, which included a $1.5 million letter of credit to collateralize our captive insurance company.
11
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
(5) Fair Value Measurement:
We follow the provisions of Accounting Standards Codification, or 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 (e.g., 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 $110.5 million and $120.7 million as of July 31, 2022 and April 30, 2022, 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 judgments about the assumptions a market participant would use in pricing the asset or liability.
We did not have any Level 2 or Level 3 financial assets or liabilities as of July 31, 2022.
(6) Inventories:
The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or net realizable value, as of July 31, 2022 and April 30, 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, 2022 |
|
|
April 30, 2022 |
|
Finished goods |
|
$ |
106,613 |
|
|
$ |
58,460 |
|
Finished parts |
|
|
57,563 |
|
|
|
62,187 |
|
Work in process |
|
|
6,220 |
|
|
|
5,304 |
|
Raw material |
|
|
12,105 |
|
|
|
10,709 |
|
Total inventories |
|
$ |
182,501 |
|
|
$ |
136,660 |
|
12
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
(7) Accrued Expenses and Deferred Revenue:
The following table sets forth other accrued expenses as of July 31, 2022 and April 30, 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, 2022 |
|
|
April 30, 2022 |
|
Accrued taxes other than income |
|
$ |
6,725 |
|
|
$ |
7,008 |
|
Accrued employee benefits |
|
|
3,917 |
|
|
|
3,705 |
|
Accrued other |
|
|
3,256 |
|
|
|
3,956 |
|
Accrued distributor incentives |
|
|
3,065 |
|
|
|
2,917 |
|
Accrued rebates and promotions |
|
|
2,721 |
|
|
|
1,243 |
|
Accrued professional fees |
|
|
2,142 |
|
|
|
1,997 |
|
Current portion of operating lease obligation |
|
|
1,613 |
|
|
|
1,495 |
|
Current portion of finance lease obligation |
|
|
1,186 |
|
|
|
1,158 |
|
Deferred revenue |
|
|
3 |
|
|
|
3 |
|
Total accrued expenses and deferred revenue |
|
$ |
24,628 |
|
|
$ |
23,482 |
|
|
|
|
|
|
|
|
(8) Stockholders’ Equity:
Treasury Stock
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 three months ended July 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. As of July 31, 2021, there were no purchases under this authorization; however, this authorization was completed during fiscal 2022. There were no common stock purchases through the three months ended July 31, 2022, nor were there any unfulfilled authorizations.
Earnings 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 months ended July 31, 2022 and 2021 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended July 31, |
|
|
2022 |
|
|
2021 |
|
|
Net |
|
|
|
|
|
Per Share |
|
|
Net |
|
|
|
|
|
Per Share |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic earnings |
$ |
|
3,312 |
|
|
|
45,739 |
|
|
$ |
|
0.07 |
|
|
$ |
|
76,882 |
|
|
|
48,394 |
|
|
$ |
|
1.59 |
|
Effect of dilutive stock awards |
|
— |
|
|
|
363 |
|
|
|
— |
|
|
|
— |
|
|
656 |
|
|
|
— |
|
Diluted earnings |
$ |
|
3,312 |
|
|
|
46,102 |
|
|
$ |
|
0.07 |
|
|
$ |
|
76,882 |
|
|
|
49,050 |
|
|
$ |
|
1.57 |
|
For the three months ended July 31, 2022, the amount of restricted stock units, or RSU's, excluded from the computation of diluted earnings per share was 18,641 because the effect would be antidilutive. All of our outstanding shares were included in the computation of diluted earnings per share for the three months ended July 31, 2021.
Incentive Stock and Employee Stock Purchase Plans
In September 2013, our Board of Directors approved the 2013 Incentive Stock Plan under which employees and non-employees may be granted stock options, restricted stock awards, restricted stock units, stock appreciation rights, and bonus stock awards.
In July 2022, our Board of Directors approved the Smith & Wesson Brands, Inc. 2022 Incentive Stock Plan under which employees and non-employees may be granted stock options, restricted stock awards, restricted stock units, stock appreciation rights, and bonus stock awards. Our stockholders will be asked to approve this plan at our annual meeting of stockholders on September 12, 2022.
13
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
We have an Employee Stock Purchase Plan, or the ESPP, under which each participant is granted an option to purchase our common stock at a discount 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, RSUs, and performance-based RSUs, or PSUs, was $1.2 million and $1.5 million for the three months ended July 31, 2022 and 2021, respectively. We include stock-based compensation expense in cost of sales, sales and marketing, research and development, and general and administrative expenses.
We grant RSUs to employees and non-employee 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, from time to time, 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 three months ended July 31, 2022, we granted an aggregate of 229,721 RSUs, including 157,227 RSUs to non-executive officer employees and 72,494 RSUs to our executive officers. During the three months ended July 31, 2022, we granted 108,736 PSUs to certain of our executive officers. During the three months ended July 31, 2022, we cancelled 2,472 RSUs as a result of the service conditions not being met. In connection with the vesting of RSUs, during the three months ended July 31, 2022, we delivered common stock to our employees and directors, including our executive officers, with a total market value of $2.2 million. In connection with a 2018 grant, which vested in fiscal 2022, we delivered market-condition PSUs to certain of our executive officers and a former executive officer with a total market value of $1.2 million. In addition, in connection with a 2019 grant, 57,600 PSUs vested to certain of our executive officers and a former executive officer, which resulted from achieving the maximum performance of 200.0% of target for the original 28,800 PSUs granted.
During the three months ended July 31, 2021, we granted an aggregate of 126,430 RSUs, including 66,441 RSUs to non-executive officer employees and 49,277 RSUs to our executive officers. During the three months ended July 31, 2021, we granted 73,913 PSUs to certain of our executive officers. During the three months ended July 31, 2021, we cancelled 1,502 RSUs as a result of the service conditions not being met. In connection with the vesting of RSUs, during the three months ended July 31, 2021, we delivered common stock to our employees and directors, including our executive officers, with a total market value of $2.2 million. In addition, in connection with a 2018 grant, we vested 86,400 market-condition PSUs to certain of our executive officers and a former executive officer, which resulted from achieving the maximum performance of 200.0% of target for the original 43,200 PSUs granted.
A summary of activity for unvested RSUs and PSUs for the three months ended July 31, 2022 and 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended July 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
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 |
|
|
830,813 |
|
|
$ |
13.30 |
|
|
|
995,879 |
|
|
$ |
10.65 |
|
Awarded (a) |
|
|
367,257 |
|
|
|
13.70 |
|
|
|
243,543 |
|
|
|
16.45 |
|
Vested |
|
|
(238,444 |
) |
|
|
12.72 |
|
|
|
(115,763 |
) |
|
|
13.42 |
|
Forfeited |
|
|
(2,472 |
) |
|
|
15.47 |
|
|
|
(1,502 |
) |
|
|
12.07 |
|
RSUs and PSUs outstanding, end of period |
|
|
957,154 |
|
|
$ |
13.60 |
|
|
|
1,122,157 |
|
|
$ |
11.62 |
|
——————————
(a)Includes 28,800 and 43,200 PSUs vested during the three months ended July 31, 2022 and 2021, respectively, in connection with achieving maximum performance targets for the 2019 and 2018 grants, respectively.
As of July 31, 2022, there was $5.4 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 1.7 years.
14
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
(9) 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. In July 2019, the Ninth Circuit reversed the dismissal and remanded the case to the District Court to perform a traditional forum non conveniens analysis. In September 2019, the parties stipulated that they do not contest that the venue is proper in the District of Idaho. In November 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. In September 2021, Gemini filed a motion for summary judgment seeking to dismiss our counterclaim. In October 2021, we filed our opposition to Gemini’s motion. On June 27, 2022, the court denied Gemtech's motion for summary judgment. We believe the claims asserted in the complaint have no merit, and we intend to aggressively defend this action
We are a defendant in seven product liability cases and are aware of seven 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 in August 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 Lake Superior Court, County of Lake, Indiana 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. In May 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. In July 2019, defendants filed a Petition to Transfer jurisdiction to the Indiana Supreme Court. In November 2019, the Indiana Supreme Court denied our petition to transfer and the case was returned to the trial court. Discovery remains ongoing.
In May 2018, we were named in an action related to the Parkland, Florida shooting that was 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 applies only 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. In December 2018, the court granted defendants’ motion to dismiss without prejudice and granted plaintiffs leave to amend their complaint. Later in December 2018, plaintiffs filed a Second Amended Complaint for Declaratory Relief and defendants filed a Motion to Dismiss Plaintiffs’ Second Amended Complaint. In November 2019, the court granted defendants’ motion to dismiss plaintiffs’ second amended complaint, with prejudice. In June 2021, upon plaintiffs’ motion, the Fourth District Court of Appeal of the State of Florida, or the Court of Appeal, ruled that the Circuit Court’s order dismissing the case was not “final and appealable,” and ordered the Circuit Court to enter a final order of dismissal. In July 2021, plaintiffs Frederic and Jennifer Guttenberg filed a notice of appeal to the Court of Appeal. Briefing in the Court of Appeal is complete. Oral argument was held on July 12, 2022. No decision has been issued to date.
We are a defendant in a putative class proceeding before the Ontario Superior Court of Justice in Toronto, Canada that was filed in December 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 in July 2018 and their family members. One victim was shot and injured during the shooting. The other victim 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. In July 2020, we filed a Notice of Motion for an order striking the claim and dismissing the action in its entirety. In February 2021, the court granted our motion in part, and dismissed the plaintiffs’ claims in public nuisance and strict liability. The court declined to strike the negligent design claim, and ordered that the claim proceed to a certification motion. In March 2021, we filed a motion for leave to appeal the court’s refusal to strike the negligent design claim with the Divisional Court, Ontario Superior Court of Justice. In July 2021, plaintiffs filed a motion to stay our motion for leave to appeal with the Divisional Court, on grounds that appeal is premature. In November 2021, the Divisional Court granted plaintiffs' motion, staying our motion for leave to appeal until 30 days after the decision on the balance of plaintiffs' certification motion. Plaintiffs’ certification motion, which had been scheduled for December 2022, has been extended by the court to allow plaintiffs to file further evidence in support of certification.
15
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
In May 2020, we were named in an action related to the Chabad of Poway synagogue shooting that took place in April 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. In September 2020, we filed a demurrer and motion to strike, seeking to dismiss plaintiffs’ complaint. In July 2021, the court granted our motion in part, and reversed it in part, ruling that: (1) the PLCAA barred plaintiffs’ product liability action; (2) plaintiffs did not have standing to maintain an action under the Unfair Competition Law for personal injury related damages, but giving plaintiffs leave to amend to plead an economic injury; and (3) the PLCAA did not bar plaintiffs’ ordinary negligence and public nuisance actions because plaintiffs had alleged that we violated 18 U.S.C. Section 922(b)(4), which generally prohibits the sale of fully automatic “machineguns.” In August 2021, we filed a Petition for Writ of Mandate in the Court of Appeal of the state of California, Fourth Appellate District, Division One. In September 2021, the Court of Appeal denied our appeal. On February 22, 2022, the court consolidated the case with three related cases, in which we are not a party. On March 11, 2022, the court granted our motion, dismissing plaintiffs’ Unfair Competition Law claim, without further leave to amend. Discovery is ongoing.
We are a defendant in an action filed in the U.S. District Court for the District of Massachusetts. On August 4, 2021, the Mexican Government filed an action against several U.S.-based firearms manufacturers and a firearms distributor, claiming defendants design, market, distribute, and sell firearms in ways they know routinely arm the drug cartels in Mexico. Plaintiff alleges, among other claims, negligence, public nuisance, design defect, unjust enrichment and restitution against all defendants and violation of the Massachusetts Consumer Protection Act against us alone, and is seeking monetary damages and injunctive relief. In November 2021, defendants filed motions to dismiss plaintiff's complaint. On January 31, 2022, plaintiff filed its oppositions to our motions. Several amicus briefs were also filed with the court. On April 12, 2022, a hearing was held on defendants’ motions to dismiss.
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.
On March 9, 2022, two plaintiffs, on behalf of a proposed class of current and former employees and temporary workers who worked at our Springfield facility from November 2018 to the present, filed a claim alleging non-payment of wages and overtime in violation of the Massachusetts Wage Act and Massachusetts Fair Wage Act. The case has not been certified as a class action. We believe the claims asserted in the complaint have no merit, and we intend to aggressively defend this action.
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.
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SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
Commitments
On September 30, 2021, we announced our plan to move our headquarters and significant elements of our operations to Maryville, Tennessee in 2023, or the Relocation. In connection with the Relocation, we entered into a project agreement, or the Project Agreement, with The Industrial Development Board of Blount County and the cities of Alcoa and Maryville, Tennessee, a public, nonprofit corporation organized and existing under the laws of the state of Tennessee, or the IDB. Pursuant to the Project Agreement, we represented to the IDB that we intend to incur, or cause to be incurred, no less than $120.0 million in aggregate capital expenditures on or before December 31, 2025, create no less than 620 new jobs, and sustain an average hourly wage of at least $25.97 at the facility. Further, pursuant to the Project Agreement, we are required to, among other things, (A) execute a facility lease and an equipment lease with the IDB; (B) cause the construction of the new facility at our sole cost and expense to commence on or before May 31, 2022; (C) incur, or cause to be incurred, aggregate 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; (D) cause the construction of the new facility to be substantially completed and for a certificate of occupancy to be issued therefore on or before December 31, 2023; (E) provide the IDB with a written report certified by one of our authorized officers, not later than January 31 of each year during the period between January 31, 2024 and January 31, 2031; and (F) make certain payments to IDB in the event that our actual capital expenditures, number of employees, or average hourly wage of such employees are less than our projections.
As part of the Relocation, we intend to vacate and sublease our Missouri distribution facility. We have received indications of interest from potential third-party sublessees, and we believe that we will not incur an impairment associated with this lease. Assets associated with our assembly operations in Massachusetts and distribution operations in Missouri continue to be fully utilized, and we intend to either move those assets to Tennessee at the appropriate time or sell or sublease those assets that will not be moved. Consequently, as of July 31, 2022, we do not believe we have an impairment related to the building or assets. Subsequent to the Relocation, our Massachusetts facility will continue to remain an important part of our manufacturing activities with significant portions of the operations being unaffected by the Relocation.
In addition, at or near the conclusion of our Connecticut building lease in May 2024, we intend to relocate a portion of our plastic injection molding operations to Tennessee and will evaluate selling the remaining molding operations utilized in our Connecticut operations to a third party. As of July 31, 2022, all plastic injection molding machinery and equipment was being utilized. Therefore, we could not determine an estimated range of reasonably possible losses associated with any impairment of such assets because we have not yet determined which assets may be sold.
(10) Restructuring:
As a result of the Relocation, we recorded $2.2 million in restructuring charges for the three months ended July 31, 2022. Of this, approximately $608,000 is reflected in selling, general and administrative expenses, approximately $1.2 million in cost of goods sold, and approximately $366,000 in marketing and distribution. There were no costs associated with the Relocation recorded for the three months ended July 31, 2021.
The components of the restructuring charges recorded in our consolidated income statement are as follows (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
For the Three Months Ended July 31, |
|
|
|
2022 |
|
|
2021 |
|
Severance and employee-related benefits (a) |
|
$ |
1,913 |
|
|
$ |
— |
|
Consulting services |
|
|
84 |
|
|
|
— |
|
Employee relations |
|
|
192 |
|
|
|
— |
|
Office rent and equipment |
|
|
31 |
|
|
|
— |
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Total restructuring expense |
|
$ |
2,220 |
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|
$ |
— |
|
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(a)None of these amounts have been paid as of July 31, 2022, and the balance has been recorded in accrued payroll and incentives on our balance sheet.
17
SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended July 31, 2022 and 2021
