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.
First Quarter Fiscal 2023 Highlights
Our operating results for the three months ended July 31, 2022 included the following:
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Net sales were $84.4 million, a decrease of $190.2 million, or 69.3%, from the comparable quarter last year.
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Gross margin was 37.3% compared with gross margin of 47.3% for the comparable quarter last year.
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Net income was $3.3 million, or $0.07 per diluted share, compared with net income of $76.9 million, or $1.57 per diluted share, for the comparable quarter last year.Net Sales and Gross Profit – For the Three Months Ended July 31, 2022
The following table sets forth certain information regarding net sales and gross profit for the three months ended July 31, 2022 and 2021 (dollars in thousands):
% of net sales (gross margin) 37.3 % 47.3 %
Sporting Goods Channel Units Shipped 2022 2021 # Change % Change Handguns
Sales of our handguns decreased $138.5 million, or 70.0%, 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 shipments into the sporting goods channel decreased by 75.5% from the comparable quarter last year while overall consumer handgun demand decreased 4.9% (as indicated by adjusted background checks reported in the National Instant Criminal Background Check System, or NICS).
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Sales of our long guns decreased $53.6 million, or 79.2%, from the comparable quarter last year. Similar to handgun sales, this decrease was primarily as a result of lower demand for the majority of our long gun products. Long gun unit shipments into our sporting goods channel decreased 80.9% from the comparable quarter last year while overall consumer demand for long guns decreased 4.5%, as indicated by NICS.
We believe the small decrease in overall firearm demand (as indicated by adjusted NICS) indicates that the market is still healthy, but has normalized from the surge levels we experienced during much of calendar 2020 and 2021. During our prior year first quarter, we saw inventory in our distribution channel begin to grow significantly for the first time in five consecutive quarters. During the current quarter, however, inventory in our distribution channel declined versus the prior year comparable quarter, resulting in a sizeable swing in our comparable financial results. We believe that we have lost market share in the short term when compared to the strong market share gains that we achieved through our ability to respond to the significant demand in fiscal 2021 and 2022; however, we believe this pull forward of our products will correct in the coming quarters as channel inventory continues to normalize and as we launch new products.
Other products and services revenue increased $1.9 million, or 20.5%, over the comparable quarter last year, primarily because of increased sales of component parts and handcuffs, partially offset by decreased business-to-business services and licensing revenue.
New products, defined as any new SKU not shipped in the comparable quarter last year, represented 21.3% of sales for the three months ended July 31, 2022 and included two new pistols, one new modern sporting rifle, and many new product line extensions.
Gross margin for the three months ended July 31, 2022 was 37.3% compared with gross margin of 47.3% for the comparable quarter last year, primarily because of a combination of reduced sales volumes across nearly all product lines, unfavorable fixed-cost absorption due to lower production volume, and expenses recorded related to employee severance and relocation costs associated with the Relocation, partially offset by decreased compensation costs and favorable inventory valuation adjustments.
As expected, our inventory balances increased $45.8 million between April 30, 2022 and July 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 slightly increase in the short term but will decline by the end of the fiscal year due to normal seasonality.
Operating Expenses
The following table sets forth certain information regarding operating expenses for the three months ended July 31, 2022 and 2021 (dollars in thousands):
Research and development expenses decreased $135,000 from the prior year comparable quarter, primarily because of decreased compensation-related costs, driven by temporarily unfilled positions, we believe, as a result of the Relocation. Selling, marketing, and distribution expenses decreased $2.6 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 and increased expenses related to industry shows. General and administrative expenses increased $240,000, primarily because of increased legal-related expenses, increased professional fees, and an increase in costs associated with the Relocation, partially offset by decreased compensation-related costs, driven by temporarily unfilled positions, we believe, as a result of the Relocation, and decreased depreciation expense.
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Operating Income
The following table sets forth certain information regarding operating income for the three months ended July 31, 2022 and 2021 (dollars in thousands):
Operating income from operations $ 3,917 $ 99,886 $ (95,969 ) -96.1 % % of net sales (operating margin) 4.6 % 36.4 %
Operating income for the three months ended July 31, 2022 decreased $96.0 million from the comparable quarter last year, primarily because of reduced sales volumes across nearly all product lines, unfavorable fixed-cost absorption, expenses recorded in relation to the Relocation, increased legal-related expenses, and increased professional fees. These unfavorable impacts were partially offset by lower digital advertising costs, lower compensation-related expenses, decreased co-op advertising expenses, and decreased freight costs.
Income Taxes
The following table sets forth certain information regarding income tax expense for the three months ended July 31, 2022 and 2021 (dollars in thousands):
Income tax expense decreased $22.3 million from the comparable quarter last year 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 July 31, 2022 and 2021 (dollars in thousands, except per share data):
Net income for the three months ended July 31, 2022 was $3.3 million compared with $76.9 million for the comparable quarter last year for the reasons outlined above.
Liquidity and Capital Resources
Our principal cash requirements are to (1) finance the growth of our operations, including working capital and capital expenditures, (2) fund the Relocation, and (3) return capital to stockholders. Capital expenditures for the Relocation, new product development, and repair and replacement of equipment represent important cash needs.
The following table sets forth certain cash flow information for the three months ended July 31, 2022 and 2021 (dollars in thousands):
Operating activities $ 7,145 $ 109,087 $ (101,942 ) -93.5 % Investing activities (11,586 ) (5,768 ) (5,818 ) -100.9 % Financing activities (5,835 ) (44,923 ) 39,088 87.0 % Total cash flow $ (10,276 ) $ 58,396 $ (68,672 ) -117.6 %
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Operating Activities
On an annual basis, operating activities generally represent the principal source of our cash flow. Cash provided by operating activities was $7.1 million for the three months ended July 31, 2022 compared with $109.1 million of cash generated for the three months ended July 31, 2021. In addition to a $73.6 million reduction in net income, cash provided by operating activities for the three months ended July 31, 2022 was negatively impacted by an incremental $27.2 million increase in inventory resulting from lower sales volumes, an incremental $21.6 million decrease in accrued income taxes due to lower forecasted income, and an incremental $3.2 million increase in prepaid expenses and other current assets. These unfavorable impacts were partially offset by a $12.6 million incremental decrease in accounts receivable due to reduced sales, an incremental $7.7 million increase in accrued payroll and incentives due to accruals related to the Relocation, and an incremental $5.2 million increase in accounts payable.
Investing Activities
Cash used in investing activities increased $5.8 million for the three months ended July 31, 2022 compared with the prior year comparable period. We paid $11.5 million for capital expenditures for the three months ended July 31, 2022, $5.8 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 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 $125.0 million and $130.0 million on capital expenditures in fiscal 2023, of which $90.0 million to $95.0 million is expected for the construction of the facility. This spending will be recorded in construction in progress throughout the building construction. Through the three months ended July 31, 2022, we have incurred $29.1 million and have paid $7.6 million for capital expenditures in connection with the Relocation.
Financing Activities
Cash used in financing activities was $5.8 million for the three months ended July 31, 2022 compared with $44.9 million for the three months ended July 31, 2021. Cash used in financing activities during the three months ended July 31, 2022 was primarily the result of a $4.6 million dividend distribution. For the three months ended July 31, 2021, cash used in financing activities was primarily the result of a $40.0 million treasury stock repurchase and a $3.8 million dividend distribution.
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 three months ending July 31, 2022, we paid approximately $278,000 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 leased space to 64.7% of the facility under the same terms as the master lease. We have recorded $544,000 of income related to this sublease agreement, which is recorded in other income/(expense) in our condensed consolidated statements of income.
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Credit Facilities – As of July 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 July 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 response to 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 July 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 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.
Dividends – In June 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 September 22, 2022 and will be payable on October 6, 2022.
Our future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, and costs related to the Relocation. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.
As of July 31, 2022, we had $110.5 million in cash and cash equivalents on hand. Based upon our current working capital position, current operating plans, and expected business conditions, we believe that our existing capital resources and credit facilities will be adequate to fund our operations, including our finance leases and other commitments, for the next 12 months.
Other Matters
Critical Accounting Policies
The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant accounting policies are disclosed in Note 2 of the Notes to the Consolidated Financial Statements in our Fiscal 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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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