Smith & Wesson Holding Corporation reported total company net sales of $94.9 million for the first fiscal quarter ended July 31, 2010 decreased $6.8 million, or 6.7%, compared with net sales of $101.7 million for the comparable quarter last year, a period that the company said “reflected a peak in industry-wide firearm sales and record sales for the company.”
Michael F. Golden, Smith & Wesson President and Chief Executive Officer, said, “Our first quarter performance was characterized by solid execution in firearms, despite challenging year-over-year comparisons, as well as the highest quarterly sales in the history of our Perimeter Security Division. The quarter was also highlighted by the successful launch of our new BODYGUARD� revolvers and pistols.”
Financial Highlights
Total company net income for the first quarter of fiscal 2011 was $6.2 million, or 10 cents per diluted share, compared with net income of $12.3 million, or 21 cents per diluted share, for the first quarter last year. Net income for the first quarter of fiscal 2011 and the first quarter of fiscal 2010 each included a non-cash, fair-value adjustment to the contingent consideration liability related to the company's acquisition of USR that increased fully diluted earnings.
First quarter fiscal 2011 adjusted EBITDAS, a non-GAAP financial measure, totaled $12.0 million compared with adjusted EBITDAS of $19.7 million for the comparable quarter last year. Further adjusted EBITDAS information, including a comprehensive description of adjusted EBITDAS as well as a GAAP to Non-GAAP reconciliation to net income, has been provided with this press release.
Firearm Division
Firearm Division sales for the first quarter were at the high end of the company's expectations. Net sales of $77.8 million decreased $21.8 million, or 21.9%, compared with record quarterly net sales of $99.6 million for the first quarter last year, a period that reflected a peak in industry-wide firearm sales and record sales for the company.
In late July, the company began shipping its innovative new BODYGUARD� revolvers and pistols, designed for the concealed carry market. Initial market response has been positive, and current capacity is sold out through December.
Gross profit in the Firearm Division for the first quarter of $28.6 million was lower than gross profit of $35.2 million for the first quarter last year due to the decrease in sales. Gross profit as a percentage of revenue was 36.8%, an increase over gross margin of 35.3% for the first quarter last year. The increase was due largely to improved operating efficiencies and reduced spending at the company's Springfield facility.
Firearm order backlog was $74.8 million at the end of the first quarter of fiscal 2011, which was $102.6 million lower than backlog at the end of the prior year comparable quarter and $33.2 million lower than the prior sequential quarter. The decline in backlog takes into account the recent initiation of BODYGUARD� product shipments. It should be noted that order backlog remains higher than longer-term historical levels, due partly to demand for BODYGUARD� products.
Perimeter Security Division
Perimeter Security sales for the first quarter of fiscal 2011 were at a record level and within the company's range of expectations. Net sales were $17.1 million compared with net sales of $2.1 million in the year ago comparable quarter. Smith & Wesson acquired the business on July 20, 2009, therefore sales in the first quarter of last year reflect only eleven days of revenue. Sales in the first quarter of fiscal 2011 grew by 60% when compared with the full year-ago quarter if pre-acquisition periods are included.
During the quarter, the Perimeter Security division realigned its sales force, including the hiring of additional sales force representatives. The company also activated systems, processes, and personnel to allow for improved conversion of opportunities into revenue during the second half of the fiscal year.
Gross profit in the Perimeter Security Division for the first quarter of $3.7 million was higher than gross profit of $106,000 for the first quarter last year as a result of a full quarter of revenue in the current period versus eleven days of revenue last year. Gross profit as a percentage of revenue was 21.4%, an increase over gross margin of 5.0% for the first quarter last year.
Perimeter Security order backlog was $24.4 million at the end of the first quarter of fiscal 2011, which was approximately $12.6 million lower than backlog at the end of the prior year comparable quarter and $10.7 million lower than the prior sequential quarter. The decline in backlog reflects extended sales cycles, partly reflecting reduced funding in the company's historical sales channels.
Operational Overview
Total company gross profit for the first quarter of $32.3 million was lower than gross profit of $35.3 million for the first quarter of last fiscal year. Gross margin as a percentage of revenue was 34.0% compared with gross margin of 34.7% for the first quarter of last fiscal year.
Total company operating expenses of $25.7 million, or 27.1% of sales, for the first quarter of fiscal 2011 increased versus operating expenses of $18.9 million, or 18.6% of sales, for the comparable quarter last year. Operating expenses included a full quarter of USR operating expenses, or $4.0 million, versus eleven days of operating expenses in the comparable quarter last year. Increased operating expenses in the Firearm Division related to legal and consulting expenses and costs related to improving our international business processes as well as increased advertising and marketing in support of new products.
Inventory was $62.6 million at the end of the first quarter compared with $50.7 million at the end of fiscal 2010. Indications are that the firearm distribution channel reduced inventories throughout the quarter and distributor purchasing patterns remained conservative in a period of economic uncertainty. As a result, the company's inventory grew in several firearm categories � a situation the company is addressing.
Accounts receivable decreased to $70.5 million compared with $73.5 million at the end of the prior fiscal year. At the end of the first quarter, the company had $26.7 million in cash and cash equivalents on hand and had no borrowings under its $60.0 million revolving line of credit.
Business Outlook
The company continues to anticipate total sales for the full fiscal 2011 of between $430.0 million and $445.0 million, representing year-over-year growth of between 6% and 10%. Full year Firearm Division sales are anticipated to be between $355.0 million and $365.0 million, with the company's Perimeter Security Division contributing $75.0 million to $80.0 million. The company continues to expect total gross profit margin for fiscal 2011 to be between 32% and 33%. The company now expects operating expenses to be approximately 23% of sales, a slight increase versus prior guidance arising from certain international business process reviews.
William F. Spengler, Executive Vice President and Chief Financial Officer, said, “We believe that firearm distributors and dealers have recently taken steps to lower their own inventories. We expect to see them begin to re-stock in the second half of the fiscal year. In the interim, we are limiting production during the second quarter. In perimeter security, increased sales force staffing and support structures are taking hold and results from these initiatives should be reflected in our second half results.”
The company expects total sales for the fiscal second quarter of 2011, the period ending October 31, 2010, to be between $97.0 million and $102.0 million. Firearm Division sales are anticipated to be between $84.0 million and $88.0 million with the Perimeter Security Division contributing the balance. Total company gross profit margin is anticipated to be between 25% and 26%, affected by an annual, scheduled two-week shutdown in two factories, and reduced production levels in the Firearm Division to further address inventory levels. Operating expense is expected to be between 25% and 26% of sales. Net income is therefore anticipated to approximate breakeven in the second quarter, reflecting lower overhead expense absorption in Firearms combined with investments in both divisions.
