Smith & Wesson Holding Corporation said net sales of $108.8 million for the second fiscal quarter ended October 31, 2009 were $35.6 million, or 48.6%, higher than net sales of $73.2 million for the comparable quarter last year.
Michael F. Golden, Smith & Wesson President and CEO, said, “We continued to capitalize in our second quarter on the strong demand for products in both our firearms and perimeter security businesses to deliver a new record level of quarterly revenue. Our factories leveraged production volumes, and we continued to focus on cost controls to deliver solid results. Sales of $93.4 million in our firearms segment exceeded the expectations we set last quarter, and our perimeter security segment, Universal Safety Response (“USR”), performed well, as anticipated, with sales of $15.4 million.”
For the second quarter of fiscal 2010, gross profit of $34.6 million, or 31.8% of sales, increased by 74.5% compared with gross profit of $19.8 million, or 27.1% of sales, for the second quarter last year. Net income for the second quarter of fiscal 2010 was $13.3 million, or 21 cents per diluted share, compared with a net loss of $76.2 million, or $1.62 per share, for the second quarter of fiscal 2009.
Net income for the second quarter of fiscal 2010 included a non-cash, fair-value adjustment to the contingent consideration liability related to our acquisition of USR that increased fully diluted earnings per share by 11 cents in the second quarter.
The purchase of USR included a provision whereby stockholders of USR could earn 4,080,000 shares of Smith & Wesson common stock in the event USR achieves established EBITDAS performance targets by December 2010. Accounting pronouncements indicate that the value of the entire earn-out amount is to be recorded as a liability as of the transaction date. This earn-out consideration was recorded as a liability on the July 20 transaction closing date of approximately $27 million based on a stock price on that date of $6.86.
Without the adjustment explained above, net income for the second quarter of fiscal 2010 would have been $6.1 million, or 10 cents per fully diluted share. It should also be noted that net income for the second quarter of fiscal 2009 included the impact of a non-cash impairment charge of $76.5 million related to a write-down of goodwill and intangible assets recorded upon the purchase of Thompson/Center Arms. Without that charge, net income for the second quarter of fiscal 2009 would have been approximately 1 penny per fully diluted share.
Adjusted EBITDAS, a non-GAAP financial measure, was $16.3 million for the second quarter compared with adjusted EBITDAS of $6.6 million for the comparable quarter last year.
William F. Spengler, EVP and Chief Financial Officer, said, “Firearm sales increased for our second quarter by $21.6 million, or 31.9%, over the comparable quarter last year. Sales of pistols increased 29.2%, as we addressed firearms backlog and ongoing consumer demand, while Walther product sales grew by 36.1%. Revolver sales increased 39.2% versus the year ago quarter, fueled by ongoing demand for smaller-framed revolvers for personal protection. Sales of tactical rifles for the quarter grew by 80.9% versus the prior year quarter, driven by consumer demand for our newly launched M&P15-22, as well as law enforcement demand for our standard M&P15 tactical rifles. Sales of hunting rifles were roughly flat versus the prior year quarter.”
Spengler continued, “Gross profit increased to $34.6 million versus $19.8 million for the comparable quarter a year ago. Gross profit margin improved to 31.8% from 27.1% for the year ago quarter. Increased production of handguns and tactical rifles provided improved overhead absorption at our Springfield, Massachusetts factory. Our factory in Rochester, New Hampshire also helped gross margins by delivering improved operational efficiencies and as a result of the launch of the new T/C Venture bolt-action rifle. In addition, margins in our firearms business benefited from reduced promotional activities during the quarter.
“The perimeter security business continued to perform well, as revenue met high growth expectations and orders on hand, or backlog, at the end of the quarter reached $44.4 million, a level more than double that at the end of the prior year quarter. Gross profit margin in the perimeter security business came in below 30%, prior to purchase accounting adjustments, as a few strategic projects delivered margins that were below the norm. In addition, purchase accounting entries significantly reduced the profit from any existing, firm contracts in place at the time of our acquisition of USR, which further reduced the effect of the USR revenue on our gross margins. We continue to expect very strong growth in revenue and profitability from our perimeter security business based on ongoing, strong demand for USR's products and services and based on newer contracts. Due to the lower gross profit margins, however, we no longer anticipate that the earn-out shares associated with calendar 2009 EBITDAS results will be released. We nevertheless anticipate releasing all of the earn-out shares as of the end of calendar 2010, based on our expectation that calendar 2010 EBITDAS will meet or exceed the threshold level of $15.0 million.”
Total operating expenses of $23.4 million, or 21.5% of sales, for the quarter increased versus operating expenses of $17.3 million excluding the impairment, or 23.6% of sales, for the second quarter last year. The dollar increase in operating expenses resulted primarily from higher profit sharing and incentive compensation accruals tied to higher operating income in the firearms business, combined with $2.9 million of operating expense at USR, which was not included in the prior year results.
“Our firearms backlog was $95.8 million at the end of our second quarter. As we indicated earlier in the fall, the firearms business continues to move toward more normal levels of demand and production, evidenced by the decline in our second quarter backlog. Cancellations caused approximately 30% of this decline. Because our backlog represents product that has been ordered but not yet shipped, additional portions of the backlog can always be cancelled in the future.”
Inventory levels increased by approximately $3.8 million over fiscal 2009 year-end levels, due solely to the inclusion of USR inventory. Accounts receivable increased by $15.6 million over year-end levels to $63.8 million, due to the inclusion of $18.1 million in USR accounts receivable. At the end of the second quarter, the Company had approximately $46.4 million in cash and had no borrowings under its revolving line of credit. Following the end of the quarter, the Company paid off $4.8 million of debt, which carried interest costs in excess of 6%. The Company also expanded its revolving line of credit with TD Bank from $40 million to $60 million, but has no current plan to draw on that line.
Outlook
Spengler added, “We expect total company sales for the third quarter to be between $90 million and $95 million, an increase of between 8% and 14% over the prior year. Within that total, we expect the firearms segment to contribute between $72 million and $76 million, and the perimeter security segment to contribute the balance. Firearms revenue within this range reflects more normalized levels of demand and production versus the spike that we experienced beginning in the third quarter of fiscal 2009. In addition, third quarter revenue and factory-level overhead absorption is routinely and unfavorably impacted by an annual two-week holiday shutdown at our three firearms manufacturing factories, as well as hunting-related seasonality. With respect to USR, we anticipate gross profit margins prior to purchase accounting entries to return to above the 30% level, but note that USR results will continue to have a limited impact on total company earnings in the coming quarter due to the additional effects of purchase accounting entries.
“Based on this, we expect total company gross profit margin in the third quarter to be between 25.0% and 27.0%. We expect third quarter operating expenses to be comparable in dollars to our second quarter, reflecting increased sales and marketing expense for the SHOT show, offset by lower general and administrative costs,” concluded Spengler.
SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three For the Six
Months Ended: Months Ended:
————- ————
(in thousands, except per share data)
October October October October
31, 2009 31, 2008 31, 2009 31, 2008
——— ——— ——— ———
Net product and services
sales $108,808 $73,227 $211,045 $151,706
Cost of products and services
sold 74,245 53,418 140,859 107,049
—— —— ——- ——-
Gross profit 34,563 19,809 70,186 44,657
—— —— —— ——
Operating expenses:
Research and
development 1,041 617 1,921 1,392
Selling and
marketing 8,461 7,376 15,506 15,079
General and administrative 13,939 9,260 24,938 19,909
Impairment of
long-lived assets 0 98,243 0 98,243
— —— — ——
Total
operating
expenses 23,441 115,496 42,365 134,623
—— ——- —— ——-
Income from operations 11,122 (95,687) 27,821 (89,966)
—— ——- —— ——-
Other income/(expense):
Other income/
(expense), net 7,282 (768) 10,487 (881)
Interest income 82 129 241 187
Interest expense (1,191) (1,413) (2,522) (3,465)
—— —— —— ——
Total other income/
(expense), net 6,173 (2,052) 8,206 (4,159)
—– —— —– ——
Income before income taxes 17,295 (97,739) 36,027 (94,125)
Income tax expense 3,990 (21,509) 10,149 (20,147)
—– ——- —— ——-
Net income/comprehensive
income $13,305 $(76,230) $25,878 $(73,978)
======= ======== ======= ========
Weighted average number of
common and common
equivalent shares
outstanding, basic 59,526 47,109 56,652 46,263
—— —— —— ——
Net income per share, basic $0.22 $(1.62) $0.46 $(1.60)
===== ====== ===== ======
Weighted average number of
common and common
equivalent shares
outstanding, diluted 66,806 47,109 63,965 46,263
—— —— —— ——
Net income per share, diluted $0.21 $(1.62) $0.42 $(1.60)
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