SMITH & WESSON BRANDS, INC. (SWBI) FY 2025 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

This section generally discusses year-to-year comparisons between fiscal 2025 and fiscal 2024. A discussion of our results of operations, liquidity, and capital resources for fiscal 2024 compared with fiscal 2023 is not included in this Annual Report on Form 10-K and can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for fiscal 2024, filed with the SEC on June 20, 2024. See also the discussion below related to an immaterial correction of an error.

2025 Highlights

Our operating results for fiscal 2025 included the following:

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Net sales of $474.7 million represented a decrease of $61.2 million, or 11.4%, from the prior fiscal year.

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Gross profit decreased $30.9 million, or 19.6%, from the prior fiscal year, primarily as a result of lower sales volume and a shift in product mix. Gross margin decreased 270 basis points from the prior fiscal year in spite of a $3.2 million legal settlement recognized in the prior year comparable period. Excluding the impact of the prior year legal settlement, gross margin was 330 basis points lower as a result of higher material costs, higher promotional costs, and a shift in product mix to lower margin products, partially offset by lower inventory adjustments (including standard cost revaluations, shrink, and excess inventory write downs).

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Net income was $13.4 million, or $0.30 per diluted share, compared with net income of $41.4 million, or $0.89 per diluted share, for the prior fiscal year.

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During fiscal 2025, we paid $23.1 million in dividends compared with $22.0 million in fiscal 2024.

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During fiscal 2025, we purchased 1,844,073 shares of our common stock for $25.5 million.

Immaterial Correction of an Error

During the fourth quarter of fiscal 2025, we identified an immaterial error related to our accrual for certain legal expenses, resulting in an overstatement of general and administrative expenses in the interim and annual periods for the year ended April 30, 2024 and during the interim periods for the year ended April 30, 2025. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the quantitative and qualitative considerations of the error and determined that the related impact was not material to results of operations, financial position, or cash flows for any historical annual or interim period. Prior year amounts have been adjusted to correct the immaterial error, which overstated accrued expenses and deferred revenue and general and administrative expenses by $2.3 million and understated income tax expense by $569,000 and overstated the related amounts of income tax receivable by $548,000 and deferred income taxes by $21,000 as of April 30, 2024 and for the year then ended. Related changes to net income, corresponding line items within cash provided by operating activities, and related disclosures within the notes accompanying these financial statements, reflect the immaterial correction.

Key Performance Indicators

We evaluate the performance of our business based upon operating profit and net income, which includes net sales, cost of sales, selling and administrative expenses, and certain components of other income and expense. We also track our return on invested capital, and we use adjusted EBITDAS (earnings before interest expense, taxes, depreciation, amortization, and stock-based compensation expense, excluding certain non-operational items), which is a non-GAAP financial metric, as a supplemental measure of our performance in order to provide investors with an

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improved understanding of underlying performance trends. We evaluate the performance of our products using measurements such as gross margin per unit produced, units produced per day, revenue by trade channel, and incoming orders per day.

External Factors that Impact the Firearm Industry

The firearm industry has been subject to many external factors in the past that have significantly increased the volatility of revenue generated for companies within the industry. These factors include, among others, fears surrounding crime and terrorism; significant news events; potential restrictions on the sale or makeup of firearms; actual and potential legislative, judicial, and regulatory actions; economic changes; and changes in the social and political environment, including congressional and presidential elections. See Item 1A, Risk Factors, for further discussion of external factors that impact the firearm industry. Although these external factors have created demand surges and volatility in the firearm market, and often make it difficult to predict demand, we believe that those external factors have also likely contributed to a long-term increase in consumer interest in firearms. We estimate that the annual domestic non-military firearm market is approximately $2.8 billion for handguns and $1.9 billion for long guns, excluding shotguns, based on the latest data for industry shipments as calculated by the National Shooting Sports Foundation, or NSSF, utilizing Firearms and Ammunition Excise Tax data for calendar year 2023. According to calendar 2024 reports by the ATF, the U.S. firearm manufacturing industry grew at a 1.5% compound annual growth rate in units from 2018 through 2023, although there has been wide variation among years (e.g., 2019 to 2020 grew 58.0%). We believe that this expanding base of consumers combined with our strong brand reputation and attractive price points lend support to our goal of continuing to increase our market share.

Results of Operations

Net Sales and Gross Profit

The following table sets forth certain information regarding net sales and gross profit for the fiscal years ended April 30, 2025, 2024, and 2023 (dollars in thousands):

The following table sets forth certain information regarding units shipped by trade channel for the fiscal years ended April 30, 2025, 2024, and 2023 (units in thousands):

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Sales of our handguns decreased $50.0 million, or 13.1%, from fiscal 2024, primarily as a result of lower consumer demand within the industry and a shift in product mix to lower priced models, partially offset by increased shipments of newly introduced products (defined as any new SKU not shipped in the prior year), which represented 42.6% of handgun sales in the period, and a 2%-5% price increase on select products that became effective in the third fiscal quarter of fiscal 2024. Handgun unit shipments into the sporting goods channel decreased 3.5% from fiscal 2024, while overall consumer demand decreased 3.2%, (as indicated by adjusted background checks for handguns reported to the National Instant Criminal Background Check System, or NICS).

Sales of our long guns decreased $12.5 million, or 10.8%, from fiscal 2024, primarily as a result of lower consumer demand within the industry, partially offset by increased shipments of new products in the fiscal year, which represented 59.5% of sales in the period, a shift in product mix to higher priced models, and a 2%-5% price increase on select products that became effective in the third fiscal quarter of fiscal 2024. Unit shipments into the sporting goods channel decreased 24.8% from fiscal 2024, while overall consumer demand for long guns decreased 2.1%, as indicated by NICS. We believe that our unit demand declined at a significantly greater rate than NICS as a result of a combination of the industry-wide performance in some of the long gun categories in which we participate relative to those categories in which we do not participate fully, specifically hunting, as well as the impact in the current year of newly introduced products from the prior year that are at lower price points.

Other products and services sales increased $1.3 million, or 3.5%, over fiscal 2024, primarily because of increased component parts and suppressor sales, partially offset by lower business-to-business sales.

New products represented 42.8% of net sales for the 12 months ended April 30, 2025 and included six new pistols, six new long guns, and many new product line extensions.

Gross margin decreased 270 basis points from the prior fiscal year in spite of a $3.2 million legal settlement recognized in the prior year comparable period. Excluding the impact of the prior year legal settlement, gross margin was 330 basis points lower as a result of higher material costs, higher promotional costs, and a shift in product mix to lower margin models, partially offset by lower inventory adjustments (including standard cost revaluations, shrink, and excess inventory write downs).

Inventory balances increased $29.3 million between April 30, 2024 and April 30, 2025 as a result of a slowdown in demand combined with level loading of our manufacturing facilities to ensure our ability to satisfy anticipated future 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 to moderately decline during fiscal 2026.

Operating Expenses

The following table sets forth certain information regarding operating expenses for the fiscal years ended April 30, 2025, 2024, and 2023 (dollars in thousands):

Research and development expenses increased $2.3 million, primarily because of higher materials and testing costs associated with new product development and higher compensation-related costs. Selling, marketing, and distribution expenses increased $702,000 in spite of a $1.9 million impairment on distribution equipment related to the Relocation and one-time costs related to our grand opening event at our Maryville facility in fiscal 2024. Excluding

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the impact of these one-time prior year charges, selling, marketing, and distribution expenses increased $3.5 million, primarily as a result of higher spending on promotions and higher compensation-related costs. General and administrative expenses decreased $8.2 million, primarily because of lower Relocation costs, lower profit-related compensation expense, and lower insurance costs, partially offset by higher legal costs. During fiscal 2025, we sold certain real estate located adjacent to our former Missouri distribution center for $2.3 million, net of transaction costs, and recognized a $2.3 million pre-tax gain on sale.

Operating Income

The following table sets forth certain information regarding operating income for the fiscal years ended April 30, 2025, 2024, and 2023 (dollars in thousands):

Operating income for fiscal 2025 decreased $23.2 million, or 49.3%, from the prior fiscal year, primarily for the reasons outlined above.

Other Income

The following table sets forth certain information regarding other income for the fiscal years ended April 30, 2025, 2024, and 2023 (dollars in thousands):

Other income for fiscal 2025 decreased $6.7 million, primarily as a result of the sale of certain intangible assets in fiscal 2024.

Interest Expense

The following table sets forth certain information regarding interest expense for the fiscal years ended April 30, 2025, 2024, and 2023 (dollars in thousands):

Interest expense increased by $2.6 million, primarily as a result of higher average debt balances and lower average cash balances compared with fiscal 2024.

Income Tax Expense

The following table sets forth certain information regarding income tax expense for the fiscal years ended April 30, 2025, 2024, and 2023 (dollars in thousands):

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We recorded income tax expense of $5.8 million for fiscal 2025, $4.5 million lower than the prior fiscal year, primarily because of decreased profitability. Our effective tax rates were 30.2% and 20.0% for fiscal 2025 and 2024, respectively. The 2024 rate was impacted favorably as a result of an amendment of prior year returns for the foreign derived income deduction that reduced 2024 income tax expense by $1.4 million, or 2.9%. Adjusting for the foreign derived income deduction for each year, the effective tax rate would have been 22.8% for fiscal 2024, which is 7.9% lower than fiscal 2025 due primarily to decreased pretax income and changes in state apportionment and other state adjustments.

Net Income

The following table sets forth certain information regarding net income and the related per share data for the fiscal years ended April 30, 2025, 2024, and 2023 (dollars in thousands, except per share data):

Net income decreased $27.9 million, or $0.59 per diluted share, from fiscal 2024 primarily for reasons outlined above.

Liquidity and Capital Resources

Our principal cash requirements are to finance the growth of our operations, including working capital and capital expenditures, and return capital to our stockholders. Capital expenditures for new product development and repair and replacement of equipment represent important cash needs.

The following table sets forth certain cash flow information for the fiscal years ended April 30, 2025, 2024, and 2023 (dollars in thousands):

Operating Activities

Operating activities generally represent the principal source of our cash flow.

Cash used in operating activities was $7.2 million in fiscal 2025 compared with $106.7 million of cash provided in fiscal 2024. Cash used in operating activities in fiscal 2025 was unfavorably impacted by a $29.3 million increase in inventory compared with a $16.6 million decrease in inventory in fiscal 2024, a $14.8 million decrease in accounts payable compared with a $18.2 million increase in accounts payable in fiscal 2024, an $8.1 million decrease in accrued payroll and incentives compared with a $1.4 million decrease in accrued payroll and incentives in fiscal 2024, a $4.4 million decrease in accrued profit sharing compared with a $895,000 increase in accrued profit sharing in fiscal 2024, and lower net income. Cash used in operating activities in fiscal 2025 was favorably impacted by a $3.2 million decrease in accounts receivable compared with a $3.9 million increase in accounts receivable in fiscal 2024.

Investing Activities

Cash used in investing activities decreased $62.3 million for fiscal 2025 compared with fiscal 2024. We paid $21.6 million for capital expenditures for fiscal 2025, which was $69.2 million lower than fiscal 2024, primarily as a result of payments related to the Relocation in the prior year period.

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We currently expect to spend $25.0 to $30.0 million on capital expenditures in fiscal 2026.

Financing Activities

Cash used in financing activities was $9.2 million for fiscal 2025 compared with $18.0 million in fiscal 2024. Cash used in financing activities during fiscal 2025 was primarily the result of $25.5 million of share repurchases and $23.1 million in dividend distributions, partially offset by $40 million of net borrowings under our revolving line of credit.

Credit Facilities — We entered into the Second Amended and Restated Credit Agreement on October 3, 2024. The Second Amended and Restated Credit Agreement provides for a revolving line of credit of $175.0 million at any one time, or the Revolving Line. The Revolving Line bears interest at either the Base Rate (as defined in the Second Amended and Restated Credit Agreement) or the Adjusted Term SOFR rate (as defined in the Second Amended and Restated Credit Agreement), plus an applicable margin based on our consolidated leverage ratio. The Second 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 Second Amended and Restated Credit Agreement). Subject to the satisfaction of certain terms and conditions described in the Second 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 October 3, 2029 or the date that is six months in advance of the earliest maturity of any Permitted Notes (as defined in the Second Amended and Restated Credit Agreement) under the Second Amended and Restated Credit Agreement.

As of April 30, 2025, we had $80.0 million of borrowings outstanding on the Revolving Line, bearing interest at an average rate of 6.69%, which was equal to the Adjusted Term SOFR rate plus an applicable margin.

The credit agreement for the Revolving Line contains financial covenants relating to maintaining a maximum leverage ratio and a minimum debt service coverage ratio. We were in compliance with all debt covenants as of April 30, 2025.

Share Repurchase Programs – On September 19, 2023, 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 through September 19, 2024, or the 2023 Authorization. During fiscal 2024, we purchased 793,551 shares of our common stock for $10.2 million under the 2023 Authorization. During fiscal 2025, we purchased 1,531,763 shares of our common stock for $21.4 million under the 2023 Authorization. The 2023 Authorization expired on September 19, 2024. On September 5, 2024, 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 from September 20, 2024 through September 20, 2025, or the 2024 Authorization. During fiscal 2025, we repurchased 312,310 shares of our common stock for $4.1 million under the 2024 Authorization. During fiscal 2025, we repurchased a total of 1,844,073 shares of our common stock for $25.5 million.

Finance Lease – We are a party to a material finance lease, which is a $46.2 million lease that has an effective interest rate of approximately 5.0% and is payable in 240 monthly installments through fiscal 2039, as well as a related payment and performance guaranty, dated October 26, 2017, in favor of the Original Missouri Landlord. The building is pledged to secure the amounts outstanding. As part of the Relocation, on January 31, 2023, we entered into the Assignment and Assumption Agreement and the Amended and Restated Guaranty. Because of the Amended and Restated Guaranty, we continue to account for this lease as we have since prior to the Relocation. During fiscal 2025, AOUT made payments pursuant to this lease directly to the landlord and we neither received nor paid any cash related to this arrangement. See Note 3 — Leases for additional information.

As of April 30, 2025, we had $25.2 million in cash and cash equivalents on hand.

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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 for at least the next 12 months.

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, and the costs to ensure access to adequate manufacturing capacity. Future 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.

Inflation

During fiscal 2025, 2024 and 2023 inflationary pressures resulted in increases in the cost of certain of the components, parts, raw materials, and other supplies necessary for the production of our products, as well as labor costs. We expect that inflation will continue to impact us during fiscal 2026.

Critical Accounting Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires that we make accounting estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. See Note 2 — Significant Accounting Policies for additional information.

Critical accounting estimates are defined as those reflective of significant judgments, estimates, and uncertainties, which may result in materially different results under different assumptions and conditions. We believe the following are our critical accounting estimates:

Inventories

Description: We value inventories at the lower of cost, using the first-in, first-out, or FIFO, method, or net realizable value.

Judgments and Uncertainties: An allowance for potential non-saleable inventory as a result of excess stock or obsolescence is based upon a detailed review of inventory, past history, and expected future usage.

Sensitivity of Estimate to Change: The assumptions used to assess inventory valuation consider historical activity. Changes in these estimates can have a significant impact on the assessment of excess and obsolete inventory, which could result in material losses.

Recent Accounting Pronouncements

The nature and impact of recent accounting pronouncements is discussed in Note 2 — Significant Accounting Policies to our consolidated financial statements, which is incorporated herein by reference.

Off-Balance Sheet Arrangements

We do not have any transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support or that engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected in our consolidated financial statements.

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