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.

Third Quarter Fiscal 2023 Highlights

Our operating results for the three months ended January 31, 2023 included the following:

•

Net sales were $129.0 million, a decrease of $48.7 million, or 27.4%, from the comparable quarter last year.

•

Gross margin was 32.4% compared with gross margin of 39.6% for the comparable quarter last year.

•

Net income was $11.1 million, or $0.24 per diluted share, compared with net income of $30.5 million, or $0.65 per diluted share, for the comparable quarter last year.

Our operating results for the nine months ended January 31, 2023 included the following:

•

Net sales were $334.5 million, a decrease of $348.4 million, or 51.0%, from the prior year comparable period.

•

Gross margin was 33.7% compared with gross margin of 44.3% for the prior year comparable period.

•

Net income was $24.0 million, or $0.52 per diluted share, compared with net income of $158.4 million, or $3.28 per diluted share, for the prior year comparable period.

Results of Operations

Net Sales and Gross Profit - For the Three Months Ended January 31, 2023



The following table sets forth certain information regarding net sales and gross
profit for the three months ended January 31, 2023 and 2022 (dollars in
thousands):

                                2023          2022        $ Change       % Change
Handguns                      $ 101,952     $ 132,921     $ (30,969 )        -23.3 %
Long Guns                        15,312        29,459       (14,147 )        -48.0 %
Other Products & Services        11,772        15,358        (3,586 )        -23.3 %
Total net sales               $ 129,036     $ 177,738     $ (48,702 )        -27.4 %
Cost of sales                    87,195       107,339       (20,144 )        -18.8 %
Gross profit                  $  41,841     $  70,399     $ (28,558 )        -40.6 %

% of net sales (gross margin) 32.4 % 39.6 %






The following table sets forth certain information regarding firearm units
shipped by trade channel for the three months ended January 31, 2023 and 2022
(units in thousands):

Total Units Shipped                    2023      2022      # Change      % Change
Handguns                                 223       316           (93 )    -29.4%
Long Guns                                 32        55           (23 )    -41.8%

Sporting Goods Channel Units Shipped 2023 2022 # Change % Change Handguns

                                 207       299           (92 )    -30.8%
Long Guns                                 30        50           (20 )    -40.0%

Professional Channel Units Shipped     2023      2022      # Change      % Change
Handguns                                  16        17            (1 )    -5.9%
Long Guns                                  2         5            (3 )    -60.0%

Sales of our handguns decreased $31.0 million, or 23.3%, from the comparable quarter last year. Handgun unit shipments into the sporting goods channel decreased by 30.8% from the comparable quarter last year while overall consumer handgun demand increased 1.4% (as indicated by adjusted background checks reported in the National Instant Criminal Background Check System, or adjusted



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NICS). The decrease in revenue was primarily due to decreased shipments of our M&P branded polymer pistols, partially offset by increased shipments of revolvers, and increased shipments of newly introduced products, defined as any new SKU not shipped in the comparable quarter last year, which represented 17.0% of sales in the period, as well as two price increases, one of which was across all products and one that was more limited. We believe the decrease in our handgun shipments relative to adjusted NICS was a result of easing consumer demand as competing products became more available subsequent to the pandemic, combined with a trading down in price by consumers due to heightened inflation. In addition, during our third quarter, inventory in our distribution channel declined by an additional 7.6% from our second quarter, or nearly 32.0% lower than the prior year comparable quarter, indicating that our channel partners continue to adjust inventory levels.

Sales of our long guns decreased $14.1 million, or 48.0%, from the comparable quarter last year. Long gun unit shipments into our sporting goods channel decreased 40.0% from the comparable quarter last year while overall consumer demand for long guns decreased 2.7%, as indicated by adjusted NICS. Similar to handgun sales, increased competitor activity combined with a decline of our inventory in our distribution channel by an additional 16.6% from our second quarter, or nearly 58% lower than the prior year comparable quarter, resulted in our sales of long guns in the quarter underperforming adjusted NICS results.

Other products and services revenue decreased $3.6 million, or 23.3%, from the comparable quarter last year, primarily because of decreased sales of handcuffs, component parts, and business-to-business services, as well as decreased licensing revenue.

New products represented 20.9% of sales for the three months ended January 31, 2023 and included five new pistols and many new product line extensions.

Gross margin for the three months ended January 31, 2023 was 32.4% compared with gross margin of 39.6% for the comparable quarter last year, primarily because of a combination of reduced sales volumes across nearly all product lines, the impact of inflation on raw material and finished parts, which increased approximately 6.0% over the prior year, the impact of inflation on labor costs, particularly as it relates to entry level positions, and unfavorable fixed-cost absorption due to lower production volume, partially offset by decreased compensation costs and favorable inventory valuation adjustments. We generally attempt to mitigate inflationary impacts with price increases, when and where possible, based on market dynamics; however, our ability to increase prices in recent periods has been constrained by the competitiveness of the market following the most recent surge in demand. In addition, we generally utilize process improvements to mitigate inflationary impacts; however, our ability to utilize process improvements in recent periods has been constrained by factors related to the Relocation and our ability to utilize process improvements in future periods will likely resume only once the Relocation is completed.

Our inventory balances increased $56.8 million between April 30, 2022 and January 31, 2023 as we replenished stock to provide our customers with a more robust selection of inventory and positioned ourselves for potential increases in consumer demand. During the third quarter of fiscal 2023, our inventory balances decreased $3.0 million. 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 Nine Months Ended January 31, 2023



The following table sets forth certain information regarding net sales and gross
profit for the nine months ended January 31, 2023 and 2022 (dollars in
thousands):

                                  2023          2022         $ Change       % Change
Handguns                        $ 254,356     $ 488,303     $ (233,947 )        -47.9 %
Long Guns                          46,416       157,470       (111,054 )        -70.5 %
Other Products & Services          33,693        37,053         (3,360 )         -9.1 %
Total net sales                 $ 334,465     $ 682,826     $ (348,361 )        -51.0 %
Cost of sales                     221,890       380,490       (158,600 )        -41.7 %
Gross profit                    $ 112,575     $ 302,336     $ (189,761 )        -62.8 %
% of net sales (gross margin)        33.7 %        44.3 %




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The following table sets forth certain information regarding firearm units
shipped by trade channel for the nine months ended January 31, 2023 and 2022
(units in thousands):

Total Units Shipped                    2023       2022        # Change      % Change
Handguns                                 560       1,205           (645 )    -53.5%
Long Guns                                 90         301           (211 )    -70.1%

Sporting Goods Channel Units Shipped 2023 2022 # Change % Change Handguns

                                 514       1,132           (618 )    -54.6%
Long Guns                                 82         285           (203 )    -71.2%

Professional Channel Units Shipped 2023 2022 # Change % Change Handguns

                                  46          73            (27 )    -37.0%
Long Guns                                  8          16             (8 )    -50.0%

Sales of our handguns decreased $233.9 million, or 47.9%, 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 as competing products became more available through the replenishment of depleted channel inventory, partially offset by net sales generated from increased shipments of new products, which represented 18.6% of sales in the period, and two price increases. Handgun unit shipments into the sporting goods channel decreased by 54.6% from the comparable quarter last year while overall consumer handgun demand decreased 3.4%, as indicated by adjusted NICS. In addition, during the first three quarters of fiscal 2023, inventory in our distribution channel declined by more than 29%, which negatively impacted our net sales for fiscal 2023.

Sales of our long guns decreased $111.1 million, or 70.5%, 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 as competing products became more available through the replenishment of depleted channel inventory. Long gun unit shipments into our sporting goods channel decreased 71.2% from the comparable quarter last year while overall consumer demand for long guns decreased 6.4%, as indicated by adjusted NICS. In addition, during the first three quarters of fiscal 2023, inventory in our distribution channel declined by 43%, which negatively impacted our net sales for fiscal 2023.

We believe that overall firearm demand remains healthy, as indicated by 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 adjusted NICS primarily because of an over-replenishment of our channel inventory during the first three quarters of fiscal 2022, at which time channel inventory peaked, and which led to our distribution partners actively seeking to reduce inventory during fiscal 2023.

Other products and services revenue decreased $3.4 million, or 9.1%, from the prior year comparable period, primarily because of decreased sales of component parts, business-to-business services, and decreased licensing revenue, partially offset by increased sales of handcuffs.

New products represented 22.5% of sales for the nine months ended January 31, 2023 and included five new pistols and many new product line extensions.

Gross margin for the nine months ended January 31, 2023 was 33.7% compared with gross margin of 44.3% for the comparable period last year, primarily because of a combination of reduced sales volumes across nearly all product lines, the impact of inflation on raw material and finished parts, which increased approximately 6.3% over the prior year, the impact of inflation on labor costs, particularly as it relates to entry level positions, and unfavorable fixed-cost absorption due to lower production volume, and expenses related to employee severance, partially offset by decreased compensation costs and favorable inventory valuation adjustments. As noted above, we generally attempt to mitigate inflationary impacts with price increases, when and where possible, based on market dynamics, and process improvements, although our ability to utilize process improvements in recent periods has been constrained by factors related to the Relocation.



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Operating Expenses

The following table sets forth certain information regarding operating expenses for the three months ended January 31, 2023 and 2022 (dollars in thousands):



                                       2023         2022       $ Change       % Change
Research and development             $  2,133     $  1,716     $     417           24.3 %
Selling, marketing, and distribution    9,996       11,518        (1,522 )        -13.2 %
General and administrative             15,576       17,443        (1,867 )        -10.7 %
Total operating expenses             $ 27,705     $ 30,677     $  (2,972 )         -9.7 %
% of net sales                           21.5 %       17.3 %

Research and development expenses increased $417,000 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 $1.5 million, primarily as a result of decreased compensation-related expenses resulting from lower profit-related compensation costs and temporarily unfilled positions, decreased advertising costs, decreased co-op advertising expenses on lower sales, and decreased costs associated with the Relocation, partially offset by increased spending on targeted customer promotions and increased expenses relating to industry shows. General and administrative expenses decreased $1.9 million, primarily because of decreased profit sharing expense, decreased compensation-related costs, driven by temporarily unfilled positions, which we believe were as a result of the Relocation, lower profit-related compensation costs, and lower costs associated with the Relocation.

The following table sets forth certain information regarding operating expenses for the nine months ended January 31, 2023 and 2022 (dollars in thousands):



                                         2023         2022       $ Change       % Change
Research and development               $  5,675     $  5,269     $     406            7.7 %
Selling, marketing, and distribution     27,454       33,575        (6,121 )        -18.2 %
General and administrative               48,867       58,491        (9,624 )        -16.5 %
Total operating expenses               $ 81,996     $ 97,335     $ (15,339 )        -15.8 %
% of net sales                             24.5 %       14.3 %

Research and development expenses increased $406,000 over the prior year comparable period, primarily because of increased new product development costs, partially offset by decreased compensation-related costs. Selling, marketing, and distribution expenses decreased $6.1 million, primarily as a result of decreased compensation-related expenses, decreased co-op advertising expenses, decreased advertising costs, and decreased freight costs due to lower shipments, partially offset by increased spending on targeted customer promotions, and increased expenses related to industry shows. General and administrative expenses decreased $9.6 million, primarily because of decreased profit-related compensation costs, lower costs associated with the Relocation, decreased profit sharing expense, decreased legal-related expenses, and decreased bad debt expense.

Operating Income

The following table sets forth certain information regarding operating income for the three months ended January 31, 2023 and 2022 (dollars in thousands):



                                    2023         2022       $ Change       % Change

Operating income from operations $ 14,136 $ 39,722 $ (25,586 ) -64.4 % % of net sales (operating margin) 11.0 % 22.3 %

Operating income for the three months ended January 31, 2023 decreased $25.6 million from the comparable quarter last year, primarily because of reduced sales volumes across nearly all product lines, unfavorable fixed-cost absorption, increased product development costs, increased costs on targeted customer promotions, and increased expenses related to industry shows, partially offset by decreased co-op advertising expenses, decreased profit-related compensation expenses, decreased profit sharing expense, decreased digital advertising costs, decreased costs associated with the Relocation, and favorable inventory valuation adjustments.

The following table sets forth certain information regarding operating income for the nine months ended January 31, 2023 and 2022 (dollars in thousands):



                                      2023         2022         $ Change       % Change

Operating income from operations $ 30,579 $ 205,001 $ (174,422 ) -85.1 % % of net sales (operating margin) 9.1 % 30.0 %






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Operating income for the nine months ended January 31, 2023 decreased $174.4 million from the prior year comparable period, primarily because of reduced sales volumes across nearly all product lines, unfavorable fixed-cost absorption, increased product development costs, 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, decreased legal-related expenses, decreased costs associated with the Relocation, and favorable inventory valuation adjustments.

Income Taxes

The following table sets forth certain information regarding income tax expense for the three months ended January 31, 2023 and 2022 (dollars in thousands):



                                            2023           2022        $ Change       % Change
Income tax expense                       $    3,389     $    9,337     $  (5,948 )        -63.7 %
% of income from operations (effective
tax rate)                                      23.4 %         23.4 %                        0.0 %

Income tax expense decreased $5.9 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 nine months ended January 31, 2023 and 2022 (dollars in thousands):



                                            2023          2022        $ Change       % Change
Income tax expense                        $   7,483     $  47,281     $ (39,798 )        -84.2 %
% of income from operations (effective
tax rate)                                      23.7 %        23.0 %                        0.7 %

Income tax expense decreased $39.8 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 January 31, 2023 and 2022 (dollars in thousands, except per share data):



                         2023         2022       $ Change       % Change
Income from operations $ 11,079     $ 30,542     $ (19,463 )        -63.7 %
Net income per share
Basic                  $   0.24     $   0.65     $   (0.41 )        -63.1 %
Diluted                $   0.24     $   0.65     $   (0.41 )        -63.1 %

Net income for the three months ended January 31, 2023 was $11.1 million compared with $30.5 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 nine months ended January 31, 2023 and 2022 (dollars in thousands, except per share data):



                           2023         2022         $ Change       % Change
Income from operations   $ 24,039     $ 158,359     $ (134,320 )        -84.8 %
Net income per share
Basic                    $   0.52     $    3.32     $    (2.80 )        -84.3 %
Diluted                  $   0.52     $    3.28     $    (2.76 )        -84.1 %

Net income for the nine months ended January 31, 2023 was $24.0 million compared with $158.4 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.



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The following table sets forth certain cash flow information for the nine months ended January 31, 2023 and 2022 (dollars in thousands):



                         2023           2022         $ Change      % Change
Operating activities   $ (21,248 )   $  112,275     $ (133,522 )      -118.9 %
Investing activities     (64,752 )      (15,211 )      (49,541 )      -325.7 %
Financing activities       9,868       (102,813 )      112,681         109.6 %
Total cash flow        $ (76,132 )   $   (5,749 )   $  (70,383 )      1224.3 %


Operating Activities

On an annual basis, operating activities generally represent the principal source of our cash flows. Cash used in operating activities was $21.2 million for the nine months ended January 31, 2023 compared with $112.3 million of cash generated for the nine months ended January 31, 2022. In addition to a $134.3 million reduction in net income, cash used in operating activities for the nine months ended January 31, 2023 was negatively impacted by an incremental $12.9 million smaller decrease in accounts receivable, partially offset by an incremental $21.3 million increase in accounts payable.

Investing Activities

Cash used in investing activities increased $49.5 million for the nine months ended January 31, 2023 compared with the prior year comparable period. We paid $64.6 million for capital expenditures for the nine months ended January 31, 2023, $49.5 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 approximately $160.0 million to $170.0 million through the end of fiscal 2024. We expect to spend between $95.0 million and $100.0 million on capital expenditures in fiscal 2023, of which $65.0 million to $70.0 million is expected for the construction of the facility. This spending will be recorded in construction in progress throughout the building construction. Through the nine months ended January 31, 2023, we have incurred $59.3 million and paid $52.8 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 provided by financing activities was $9.9 million for the nine months ended January 31, 2023 compared with $102.8 million used in financing activities for the nine months ended January 31, 2022. Cash provided by financing activities during the nine months ended January 31, 2023 was primarily a result of $25.0 million of borrowings under our Revolving Line, partially offset by $13.7 million in dividend distributions. For the nine months ended January 31, 2022, cash used in financing activities was primarily the result of a $90.0 million treasury stock repurchase and $11.4 million in dividend distributions.

Finance Lease - We are a party to a $46.2 million lease for our Missouri distribution center, 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 nine months ending January 31, 2023, we paid approximately $559,000 in principal payments relating to this finance lease. With the completion of the Separation, we entered into the Sublease. On July 16, 2022, we entered into an amendment to the Sublease, increasing the subleased space to 64.7% of the facility under the same terms as the MO Lease. On January 31, 2023, we entered into the Assignment and Assumption Agreement and the Amended and Restated Guaranty. We intend to terminate the Sublease on or around the effective date of the Assignment and Assumption Agreement. For the nine months ended January 31, 2023, we recorded $1.7 million of income related to the Sublease, which is recorded in other income/(expense) in our condensed consolidated statements of income.

Credit Facilities - As of January 31, 2023, we had $25.0 million of borrowings outstanding on the Revolving Line. 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 January 31, 2023. 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



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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. We are currently negotiating with our lenders to transition from LIBOR to SOFR, which may affect our future borrowing rates.

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 January 31, 2023.

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 March 16, 2023 and will be payable on March 30, 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. 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 January 31, 2023, we had $44.6 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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