SMITH & WESSON BRANDS, INC. (SWBI)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Please refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2026 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.

This section generally discusses year-to-year comparisons between the three months ended July 31, 2026 and 2025. A discussion of our results of operations, liquidity, and capital resources for the three months ended July 31, 2025 compared to July 31, 2024 is not included in this Quarterly Report on Form 10-Q and can be found in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2025, filed with the Securities and Exchange Commission, or the SEC, on September 4, 2025.

First Quarter Fiscal 2027 Highlights

Our operating results for the three months ended July 31, 2026 included the following:

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Net sales were $112.6 million, an increase of $27.5 million, or 32.3%, over the comparable quarter last year.

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Gross margin was 28.7% compared with gross margin of 25.9% for the comparable quarter last year.

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Net income was $2.6 million, or $0.06 per diluted share, compared with a net loss of $3.4 million, or $0.08 per diluted share, for the comparable quarter last year.

Results of Operations

Net Sales and Gross Profit – For the Three Months Ended July 31, 2026

The following table sets forth certain information regarding net sales and gross profit for the three months ended July 31, 2026 and 2025 (dollars in thousands):

The following table sets forth certain information regarding firearm units shipped by trade channel for the three months ended July 31, 2026 and 2025 (units in thousands):

Sales of our handguns increased $18.8 million, or 29.0%, over the comparable quarter last year, primarily as a result of higher consumer demand, a shift in product mix to higher priced models, increased shipments of newly introduced products (defined as any new SKU not shipped in the comparable period last year), and a 2% to 3% price increase on select products that became effective on January 1, 2026. Shipments of new products represented 43.1% of handgun sales in the quarter. Handgun unit shipments into the sporting

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goods channel increased by 16.7% over the comparable quarter last year while overall demand for handguns increased by 4.7% (as indicated by adjusted background checks reported in the National Instant Criminal Background Check System, or NICS).

Sales of our long guns increased $6.8 million, or 49.9%, over the comparable quarter last year, primarily as a result of higher consumer demand during the period and a shift in product mix to higher priced models. Shipments of new products represented 17.6% of long gun sales in the period. Long gun unit shipments into the sporting goods channel increased by 21.7% from the comparable quarter last year while overall demand for long guns increased by 10.1% (as indicated by NICS).

Other products and services revenue increased $1.9 million, or 29.0%, over the comparable quarter last year, primarily because of higher parts and suppressor sales.

Newly introduced products represented 35.3% of overall net sales for the three months ended July 31, 2026 and included one new pistol, one new long gun, and many new product line extensions.

Gross margin for the three months ended July 31, 2026 was 28.7% compared with 25.9% for the comparable quarter last year, primarily driven by $2.9 million in International Emergency Economic Powers Act tariff refunds received under the U.S. Customs and Border Protection's refund process. These refunds favorably impacted gross margin by approximately 260 basis points and represented a non-recurring benefit. Excluding the impact of tariff refunds, gross margin for the three months ended July 31, 2026 was 26.1%. Gross margin was also favorably impacted by fixed-cost absorption from higher production volumes, partially offset by higher labor costs.

Inventory balances increased $24.4 million between April 30, 2026 and July 31, 2026 as a result of 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 build through the second quarter of fiscal 2027 and then decline during the remainder of the fiscal year.

Operating Expenses

The following table sets forth certain information regarding operating expenses for the three months ended July 31, 2026 and 2025 (dollars in thousands):

Research and development expenses decreased $450,000 from the prior year comparable quarter primarily because of higher tooling costs in the prior year period, partially offset by higher compensation-related costs. Selling, marketing, and distribution expenses increased $1.4 million, primarily as a result of higher volume-related costs, including cooperative advertising and freight. General and administrative expenses increased $2.0 million over the prior year comparable quarter, primarily as a result of higher legal costs and profit-related compensation expenses.

Operating Income

The following table sets forth certain information regarding operating income for the three months ended July 31, 2026 and 2025 (dollars in thousands):

Operating income for the three months ended July 31, 2026 increased $7.2 million over the comparable quarter last year, primarily for the reasons outlined above.

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Interest Expense, net

The following table sets forth certain information regarding interest expense, net for the three months ended July 31, 2026 and 2025 (dollars in thousands):

Interest expense, net decreased by $907,000 from the comparable quarter last year, primarily as a result of lower average debt balances and lower average interest rates on debt during the three months ended July 31, 2026 compared with the comparable quarter last year.

Income Taxes

The following table sets forth certain information regarding income tax expense for the three months ended July 31, 2026 and 2025 (dollars in thousands):

Income tax expense increased $2.1 million from the comparable quarter last year, primarily as a result of higher operating income. Before adjusting for discrete items related to stock-based compensation, the effective tax rate was 28.0% in the current quarter and 33.7% in the prior year comparable quarter. The decrease in the effective tax rate before adjusting for discrete items was primarily due to an increase in forecasted pre-tax income.

Net Income/Loss

The following table sets forth certain information regarding net income/(loss) and the related per share data for the three months ended July 31, 2026 and 2025 (dollars in thousands, except per share data):

Net income for the three months ended July 31, 2026 was $2.6 million compared with a net loss of $3.4 million for the comparable quarter last year for the 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 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 three months ended July 31, 2026 and 2025 (dollars in thousands):

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Operating Activities

Cash used in operating activities was $8.8 million for the three months ended July 31, 2026 compared with cash used in operating activities of $8.1 million for the three months ended July 31, 2025, primarily as a result of a $6.6 million increase in working capital usage

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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 2026 and fiscal 2025. A discussion of our results of operations, liquidity, and capital resources for fiscal 2025 compared with fiscal 2024 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 2025, filed with the SEC on June 20, 2025.

2026 Highlights

Our operating results for fiscal 2026 included the following:

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Net sales of $523.8 million represented an increase of $49.2 million, or 10.4%, over the prior fiscal year.

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Gross profit increased $13.9 million, or 10.9%, over the prior fiscal year, primarily because of higher sales volume. Gross margin increased by ten basis points from the prior fiscal year primarily due to lower promotional costs and lower federal firearms excise taxes, partially offset by unfavorable fixed-cost absorption and a 100-basis point impact from higher tariffs.

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Net income was $18.5 million, or $0.41 per diluted share, compared with net income of $13.4 million, or $0.30 per diluted share, for the prior fiscal year.

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During fiscal 2026, we paid $23.2 million in dividends compared with $23.1 million in fiscal 2025.

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During fiscal 2026, we repaid $60.0 million on our revolving credit facility.

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, 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 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 by 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 $2.7 billion for handguns and $1.7 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 2024. According to calendar 2025 reports by the ATF, the U.S. firearm manufacturing industry grew at a 6.2% compound annual growth

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rate in units from 2019 through 2024, 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, 2026, 2025, and 2024 (dollars in thousands):

The following table sets forth certain information regarding units shipped by trade channel for the fiscal years ended April 30, 2026, 2025, and 2024 (units in thousands):

Sales of our handguns increased $62.5 million, or 18.8%, over fiscal 2025, primarily as a result of increased shipments of newly introduced products (defined as any new SKU not shipped in the prior year), higher consumer demand, and a 2% to 3% price increase on select products that became effective on January 1, 2026. Shipments of new products represented 43.6% of handgun sales in the period. Handgun unit shipments into the sporting goods channel increased 19.0% over fiscal 2025, while overall consumer demand decreased 0.2% (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 $13.5 million, or 13.0%, from fiscal 2025, primarily as a result of the timing of new product launches in fiscal 2025, which were at higher selling prices, combined with lower consumer demand during fiscal 2026. Shipments of new products represented 30.6% of long gun sales in the period. Long gun unit shipments into the sporting goods channel decreased 5.7% from fiscal 2025, while overall consumer demand for long guns decreased 4.6% (as indicated by NICS).

Other products and services sales increased $191,000, or 0.5%, over fiscal 2025, as higher e-commerce and suppressor sales offset lower business-to-business sales. Lower business-to-business sales resulted from the closure of our Deep River facility in fiscal 2025 as part of the Relocation.

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New products represented 38.1% of net sales for the year ended April 30, 2026 and included four new pistols, four new long guns, and many new product line extensions.

Gross margin for fiscal 2026 was 26.9% compared with 26.8% for fiscal 2025, primarily due to lower promotional costs and lower federal firearms excise taxes as a result of the favorable completion of a recent audit, partially offset by unfavorable fixed-cost absorption from lower production volumes combined with higher tariffs on imported materials and components. We estimate that higher tariffs negatively impacted gross margin by approximately 100 basis points when compared to the comparable period last year.

Inventory balances declined $33.6 million between April 30, 2025 and April 30, 2026 as a result of our proactive inventory management and production planning efforts intended to optimize inventory levels and cash flows. 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 increase modestly during fiscal 2027.

Operating Expenses

The following table sets forth certain information regarding operating expenses for the fiscal years ended April 30, 2026, 2025, and 2024 (dollars in thousands):

Research and development expenses increased $737,000 because of higher tooling-related costs, partially offset by materials and testing costs, which were elevated in the prior year. Selling, marketing, and distribution expenses increased $284,000, primarily as a result of higher profit-related compensation expenses and one-time costs related to the grand opening event for the Academy, partially offset by lower promotional costs. General and administrative expenses increased $5.1 million over the prior year, primarily as a result of higher profit-related and stock-based compensation expenses, and higher legal expenses. During fiscal 2025, we sold certain real estate located adjacent to our former distribution center located in Columbia, Missouri 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, 2026, 2025, and 2024 (dollars in thousands):

Operating income fo

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