Smith and Wesson Fiscal Q1 Profit Slumps

Security solutions division revenue was $7.5 million for the first quarter, down 56.4 percent from the year-ago quarter.

Gross profit was $28.1 million, or 28.4 percent of revenue, compared with gross profit of $32.2 million, or 34.0 percent of revenue, for the year-ago quarter, and included the impact of direct costs associated with the consolidation of the Thompson/Center Arms business to Springfield, Massachusetts. Excluding those direct costs, first quarter gross profit margin would have been 29.6 percent. Additionally, there were lost efficiencies reflected in gross profit margin as a result of the consolidation, which remains scheduled for completion by November 2011.

Operating expense for the first quarter totaled $25.0 million, or 25.2 percent of revenue, compared with operating expense of $25.6 million, or 27.0 percent of revenue, for the first quarter last year.  

Net income for the first quarter was $791,000, or $0.01 per diluted share.  First quarter fiscal 2012 results were negatively impacted by $0.03 per share related to the security solutions division and $0.01 per share from costs associated with the Thompson/Center Arms consolidation.  Net income for the first quarter a year ago was $6.2 million, or $0.10 per diluted share, and included the positive impact of a $0.04 per share non-cash, fair-value adjustment related to the company's acquisition of the security solutions division.  

Non-GAAP adjusted EBITDAS for the first quarter totaled $10.3 million compared with $12.0 million for the year-ago quarter.

At the end of the quarter, firearm backlog was $148.8 million and security solutions backlog was $19.9 million. Backlog is cancellable until shipped or work has been performed.

Michael F. Golden, Smith & Wesson Holding Corporation President and Chief Executive Officer, said, “Orders for our firearms remained strong in the quarter, evidenced by increased sales of our Smith & Wesson brand pistols and modern sporting rifles.  In fact, firearm unit sales in our consumer channel were up 44.4 percent compared with the adjusted NICS* increase of 10.8 percent for the same three-month period ending July 31.  Professional orders for our M&P pistols increased, and handgun growth in general was supported by the continuing consumer trend toward smaller firearms designed for concealed carry and for personal protection. While the environment for our security solutions business remained challenging primarily related to constraints in government spending, we continued to focus on reshaping the business and expanding our portfolio with new products to better address the current market environment.”  

Jeffrey D. Buchanan, Executive Vice President and Chief Financial Officer, said, “We had $37.7 million in cash as of July 31, 2011 compared with cash of $26.7 million a year ago.  At quarter-end, we had no borrowings under our $120.0 million credit facility and working capital of $82.2 million.  Looking ahead, we expect to have adequate resources to address the $30.0 million of convertible notes that we believe will be put to us for repurchase in December 2011, while still maintaining our strong balance sheet. Going forward, our principal efforts will focus on lowering operating expenses across our entire organization, including pursuing further cost reductions in our security solutions division.  We are driving to achieve breakeven in the security solutions division in the second half of the current fiscal year.”    

Financial Outlook

The company now anticipates total net revenue for fiscal 2012 to be between $410.0 million and $425.0 million, which would represent growth of between 4 percent and 8 percent.  The firearm division is still expected to grow between 11 percent and 13 percent in fiscal 2012.  Therefore, the change in anticipated revenue growth for fiscal 2012 is attributable to current challenges in the security solutions market. The company now anticipates total gross profit margin for fiscal 2012 to be between 28 percent and 30 percent, and still anticipates operating expenses to be approximately 25 percent of net revenue.  

The company expects total net revenue for the second quarter of fiscal 2012 to be between $93.0 million and $96.0 million, which takes into consideration the two-week, scheduled summer factory shutdown that occurs in the firearm division each August.  Firearm division net revenue is anticipated to be between $86.0 million and $90.0 million, with the security solutions division contributing the balance. Total company gross profit margin for the quarter is anticipated to be between 25 percent and 26 percent, and is being impacted by two items related to the Thomson/Center Arms consolidation: direct expenses relating to the consolidation, which are expected to reduce gross margin by about two percentage points, and efficiency losses.  Total company operating expense is expected to be between $27.0 million and $28.0 million, reflecting costs related to the ongoing DOJ and SEC matters, costs related to the Thompson/Center Arms consolidation, and costs related to reshaping the security solutions division with the objective of achieving breakeven in that division in the second half of the current fiscal year.