Smith & Wesson Holding Corporation said net sales for the first fiscal quarter ended July 31, 2009 were $102.2 million, which was $23.8 million, or 30.3%, higher than net sales of $78.5 million for the first fiscal quarter last year.
Smith & Wesson President and CEO, Michael F. Golden, said, “Ongoing consumer demand for handguns and tactical rifles fueled our strong growth and allowed us to deliver record financial results in the first quarter. Higher production levels in our Springfield factory allowed us to capture additional revenue in the quarter, and a focus on controlling costs helped translate that revenue into profitability.”
Golden continued, “In addition to robust growth in our firearms segment, we began a new and exciting chapter in our history by entering the large and rapidly growing security market with our acquisition of USR, a leader in perimeter security solutions. There is tremendous commonality between the reputation for reliable security and safety that is held by both Smith & Wesson and USR. This is a significant step in the evolution of Smith & Wesson, which is becoming a broader-based provider of safety and security products and services. In the short time that has passed since we closed the transaction, USR has delivered strong results, winning new customers, and delivering record monthly revenue in August.”
Firearm sales increased for the first quarter by $21.7 million, or 29.6%, over the comparable quarter last year. Sales of pistols increased 14.5%, as we addressed a strong backlog and ongoing consumer demand. Orders for M&P pistols were received from a number of police agencies. In addition, Walther product sales grew 44.2% based on increased production and availability of products. Sales of M&P15 tactical rifles in the first quarter grew by 347.4% versus the comparable quarter a year ago. Revolver sales decreased 4.0% versus the comparable quarter one year ago, a decline related to low finished goods inventory at the start of the quarter, combined with strong demand for smaller-framed revolvers, which carry a lower retail price. Non-firearm sales totaled $7.5 million, a 38.7% increase from non-firearm sales of $5.4 million for the first quarter last year.
William F. Spengler, Executive Vice President and Chief Financial Officer, said, “Net sales of $102.2 million for the first quarter of fiscal 2010 represent a new record level of quarterly revenue. Sales of $99.6 million in our firearms segment exceeded our expectations, and resulted from production levels that were higher than anticipated. Sales of $2.7 million for our perimeter security segment, or USR, represent only the brief, eleven-day period between our closing of the acquisition on July 20, 2009 and the close of our fiscal quarter on July 31, 2009.
“Gross profit increased to $35.6 million versus $24.8 million for the year ago quarter. The increase, as well as the improvement in gross profit margin to 34.8% from 31.7% versus the year ago quarter, were due largely to increased sales of handguns and tactical rifles, providing improved overhead absorption at our Springfield, Massachusetts factory, coupled with greater efficiencies and cost reductions at our Rochester, New Hampshire factory. In fact, gross margins for our hunting product revenue improved substantially versus last year and contributed to our profitability in the quarter. With regard to gross margins for our perimeter security segment, purchase accounting entries preclude us from recognizing the profit from any existing, firm contracts in place at the time of our acquisition of USR, which reduced the effect of the USR revenue on our gross margins.
“Our purchase of USR in July included a provision whereby stockholders of USR could earn up to 4 million shares of Smith & Wesson common stock by December 2010, in the event USR achieved established EBITDAS performance targets. Because of recently effective accounting pronouncements and interpretations, the value of the entire earn-out amount will be recorded as a liability as of the transaction date. This earn-out consideration was originally recorded as a liability on the transaction closing date of July 20 at approximately $27 million as the stock price on that date was $6.86. Because we record changes in the fair value of this liability as of each financial statement reporting date, this liability was reduced to approximately $24 million by the end of the quarter when the closing price of our stock was $6.06. This $3.2 million reduction in the liability value is shown as a gain in our first quarter results, providing an incremental $0.05 in fully diluted earnings per share. It is important to note that this is a non-cash item, which will not affect our adjusted EBITDAS results. Moreover, the need for ongoing fair value accounting of the earn-out liability associated with the USR transaction will now subject us to potential, significant non-cash fluctuations in our reported GAAP earnings for the next six quarters. As a result, increases and decreases in the trading price of our common stock may have a significant effect on our net income and earnings per share totally apart from our operating results. In addition, any earnings guidance that we may give and any projections of our earnings by analysts will be subject to changes in our stock price.
“Operating expenses of $18.9 million, or 18.5% of sales, in the quarter decreased versus operating expenses of $19.1 million, or 24.4% of sales, in the first quarter last year. The decline was due primarily to marketing expenses and 123R compensation-related expenses, both of which are now expected to occur in the second quarter, and the collection of previously reserved-for doubtful accounts receivable reflected in income. The decrease in operating expenses as a percent of sales also reflects exercising control over our costs during this high revenue growth period,” continued Spengler.
“Net income for the first quarter of $12.6 million, or $0.21 per fully diluted share, compared with net income of $2.3 million, or $0.05 per fully diluted share, for the first quarter of last year. The firearms segment delivered earnings of $0.16 per fully diluted share, while the impact of acquisition accounting relative to our purchase of USR, as discussed earlier, delivered additional earnings of $0.05 per fully diluted share.
“Our firearms backlog was $177.5 million at the end of the first quarter. Cancellations reduced backlog by approximately 10% during the quarter. It is important to note that our backlog always represents product that has been ordered but not yet shipped. As a result, it is possible that portions of the backlog could be cancelled if demand should suddenly drop.
Spengler added, “Inventory levels increased in the quarter by $5.7 million over April 30, 2009, and included $3.8 million of USR inventory. Accounts receivable grew by $18.0 million in the quarter to $66.3 million, which included $11.2 million in USR accounts receivable. We ended the current quarter with approximately $35.2 million in cash, and we did not access our revolving line of credit. The ending cash balance takes into account minimal operations cash outflow of $2.4 million, capital expenditures of $3.7 million, and cash outlays of approximately $35.0 million relative to our acquisition of USR.”
Adjusted EBITDAS, a non-GAAP financial measure, was $20.2 million for the first quarter, nearly double EBITDAS of $10.2 million for the comparable quarter in fiscal 2009.
Outlook
As is the case with most companies, providing outlook is difficult in the current economic environment. Based on current visibility, however, we expect our total company sales for the second quarter will be between $103 million and $105 million, which would be another record revenue quarter. Within that total, we expect our firearms segment to contribute between $88 million and $90 million, and our perimeter security segment to contribute the balance. Note that our second quarter routinely includes an annual two-week shutdown of our Houston and Springfield facilities, which reduces revenue potential in the quarter and limits cost absorption at those locations.
We expect total company gross profit margin to be between 31% and 32%, a significant improvement over the 27.3% gross margin in the second quarter of last year. We expect operating expenses to be higher versus the first quarter due to the inclusion of USR and the first quarter effects previously described.
Golden concluded, “Now is an exciting time for our company. Record first quarter results, together with our acquisition of USR, combine to mark a significant milestone, establishing Smith & Wesson as a growing and diversified company that participates in security and safety on a new and broader scale.”
