Smith & Wesson Holding Corporation reported total company net sales for third fiscal quarter ended Jan. 31, 2011 slipped 1.8% to $89.3 million versus $91.0 million in the year-ago quarter. The company said these results reflected a 6.0% increase in firearm sales and a 37.8% decrease in perimeter security sales compared with the year-ago quarter.
Third Quarter Financial Highlights
Gross profit margin of 24.1% compared with 30.0% in the year-ago quarter and included reduced volumes in perimeter security sales, planned firearm manufacturing consolidation costs relating to Thompson/Center Arms, and a short-term impact in firearms related to increased distributor incentives and strategic price-repositioning initiatives. The impact on gross margin as a result of the consolidation was a 1.1 percentage point reduction.
Net sales for the third quarter of fiscal 2011 were $79.2 million, a 6.0% increase over the third quarter last year. This result was led by pistol sales growth of 47.9%. Gross profit of $19.4 million, or 24.5% of sales, was lower than gross profit of $22.8 million, or 30.5% of sales, for the comparable quarter last year.
Market demand for the company's new firearm products appeared to be strong in the quarter. As a result of consumer trends toward small firearms, the company's product mix shifted to firearms with lower unit prices, resulting in daily production volume that approached record levels near quarter end. Firearm backlog levels at the end of the third quarter grew to $73.8 million from $32.4 million at the end of the sequential second quarter of fiscal 2011.
Innovative new products remain a critical component of the company's firearm division growth strategy of meeting evolving customer demand and preferences. In line with this strategy and the trend toward personal protection and concealed carry firearms, production capacity for BODYGUARD pistols continued to expand. The Governor revolver, which is designed for home defense and allows the use of either shotgun shells or centerfire cartridges, generated substantial backlog in the third quarter and is scheduled to commence production in the fourth fiscal quarter. The M&P15 “Sport,” an opening retail price point tactical rifle, also generated notable backlog and is scheduled to begin shipping in the fourth fiscal quarter. These new products were extremely well received at the 2011 Shooting, Hunting and Outdoor Trade (SHOT) show in January.
The consolidation of the Thompson/Center Arms operations into the company's Springfield, Massachusetts facility commenced as planned in January. The company was awarded state and municipal tax incentives that will help offset the costs of consolidation.
Perimeter Security Division
Net sales for the third quarter of fiscal 2011 were $10.1 million compared with net sales of $16.2 million for the third quarter last year. Gross profit for the third quarter of $2.2 million, or 21.3% of sales, was lower than gross profit of $4.5 million, or 27.7% of sales, for the comparable quarter last year. Backlog was $19.0 million at the end of the third quarter, approximately $7.0 million lower than backlog at the end of the sequential second quarter of fiscal 2011.
Third quarter results reflected the ongoing impact of extended sales cycles, competitive pricing pressure, and reduced funding in the division's government and corporate sales channels. Cost reduction activities commenced in the quarter and focused on driving a lean infrastructure capable of supporting sales growth and new product development in the current challenging environment. During the fourth quarter, the perimeter security division, currently known as Universal Safety Response, will be rebranded Smith & Wesson Security Solutions in order to leverage the globally recognized Smith & Wesson brand name.
Business Outlook
The company currently anticipates total sales for full year fiscal 2011 of between $389.0 million and $393.0 million. Full year firearm division sales are anticipated to be between $339.0 million and $341.0 million, with the perimeter security division contributing $50.0 million to $52.0 million. The company expects total gross profit margin for full fiscal 2011 to be between 28.0% and 29.0%, which takes into consideration an approximate one half percentage point reduction in gross margin because of the impact of the Thompson/Center Arms consolidation. The company expects fiscal 2011 operating expenses to be approximately 26.0% of sales, excluding the impairment charges taken in the second and third quarters.
The company expects total sales for the fourth quarter of fiscal 2011 to be between $108.0 million and $112.0 million. Firearm division sales are anticipated to be between $98.0 million and $100.0 million, with the perimeter security division contributing the balance. Total company gross profit margin is anticipated to be between 28.0% and 29.0%, which takes into consideration an approximate one percentage point reduction in gross margin because of the impact of the Thompson/Center Arms consolidation. Total company operating expense is expected to be between 23.0% and 24.0% of sales, reflecting legal and consulting expenses related to ongoing DOJ and SEC matters, and including severance and other costs relating to the Thompson/Center Arms consolidation.
Jeffrey D. Buchanan, Executive Vice President and Chief Financial Officer, said, “We successfully exchanged $50.0 million of our convertible notes with a put date in December 2011 for unsecured senior term notes with a maturity date in January 2016. This transaction eliminated the potential need to fund $50.0 million of the possible put in December 2011 with cash. The exchange transaction is now complete, and we have ample liquidity, through cash and our available credit facility, to address the remaining $30.0 million of convertible notes that may be put to the company in December 2011.”
SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES | |||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS) | |||||||||||||
(Unaudited) | |||||||||||||
For the Three Months Ended: | For the Nine Months Ended: | ||||||||||||
(In thousands, except per share data) | |||||||||||||
January 31, 2011 | January 31, 2010 | January 31, 2011 | January 31, 2010 | ||||||||||
Net product and services sales: | |||||||||||||
Firearm division | $ | 79,238 | $ | 74,734 | $ | 240,566 | $ | 267,691 | |||||
Perimeter security division | 10,099 | 16,237 | 39,976 | 34,687 | |||||||||
Total net product and services sales | 89,337 | 90,971 | 280,542 | 302,378 | |||||||||
Cost of products and services sold: | |||||||||||||
Firearm division | 59,847 | 51,910 | 167,118 | 177,982 | |||||||||
Perimeter security division | 7,945 | 11,735 | 31,259 | 25,493 | |||||||||
Total cost of products and services sold | 67,792 | 63,645 | 198,377 | 203,475 | |||||||||
Gross profit | 21,545 | 27,326 | 82,165 | 98,903 | |||||||||
Operating expenses: | |||||||||||||
Research and development | 1,433 | 1,166 | 3,730 | 3,087 | |||||||||
Selling and marketing | 9,573 | 8,703 | 28,176 | 24,208 | |||||||||
General and administrative | 15,135 | 13,221 | 45,533 | 38,159 | |||||||||
Impairment of long-lived assets | |||||||||||||
