Business context and reporting period
Smith & Wesson Holding Corporation (now Smith & Wesson Brands, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended October 31, 2014, its fiscal second quarter and first half of fiscal 2015. The company manufactures firearms and related products. Its former Security Solutions division is reported as discontinued operations.
Financial results and liquidity
Amounts are in millions of dollars, except per-share data. Quarterly and six-month comparisons are with the periods ended October 31, 2013.
| Metric | Three months 2014 | Three months 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $108.4 | $139.3 | $240.3 | $310.3 |
| Gross profit / margin | $34.8 / 32.1% | $57.9 / 41.6% | $84.0 / 34.9% | $130.7 / 42.1% |
| Operating income / margin | $10.8 / 10.0% | $28.8 / 20.7% | $36.6 / 15.2% | $76.8 / 24.7% |
| Income from continuing operations | $5.1 | $17.1 | $19.7 | $43.7 |
| Net income | $5.1 | $17.0 | $19.6 | $43.5 |
| Diluted EPS from continuing operations | $0.09 | $0.28 | $0.36 | $0.69 |
- For the six months ended October 31, 2014, operating cash flow was negative $3.4 million, investing cash flow was negative $43.9 million, and financing cash flow was positive $42.9 million. Cash declined $4.5 million to $64.4 million.
- Cash and cash equivalents were $64.4 million at October 31, 2014, versus $68.9 million at April 30, 2014. Current assets were $244.9 million and current liabilities were $59.0 million at October 31.
- Notes payable were $175.0 million at October 31, versus $100.0 million at April 30. The company had $100 million of 5.875% senior notes due 2017 and issued $75 million of 5.000% senior notes due 2018. There were no revolver borrowings at October 31; the $75 million unsecured facility had $1.1 million of letters of credit outstanding.
- Six-month capital expenditures were $21.2 million. Management expected approximately $37 million of fiscal 2015 capital expenditures.
Material changes versus the prior comparable period
- Quarterly sales fell 22.1%; six-month sales fell 22.6%. Management attributed the decline mainly to weaker consumer demand and excess distributor and retailer inventories following the prior-year demand surge associated with possible firearm regulation.
- Long-gun sales fell 50.3% for the quarter and 60.0% for the six months, with modern sporting rifles particularly affected. Handgun sales declined 15.0% and 8.7%, respectively; small concealed-carry pistols and revolvers remained relatively strong, partly offsetting weaker larger-frame M&P pistols.
- Gross margin declined 9.5 percentage points for the quarter and 7.2 points for the six months. Lower sales of higher-margin products, increased manufacturing spending, promotional discounts, and unfavorable fixed-cost absorption were key factors. Selected price increases and the injection-molding acquisition partly offset the pressure.
- Quarterly operating income declined 62.3% and six-month operating income declined 52.3%. Six-month net income was also affected by lower sales and gross profit; reduced general and administrative expenses provided a partial offset.
- On May 5, 2014, the company acquired substantially all assets of Tri Town Precision Plastics for $24.1 million to vertically integrate a key polymer-component supplier. Purchase-price allocation remained preliminary; goodwill was recorded at $14.1 million.
- The company repurchased 2.1 million shares for $30.0 million during the six months, completing its authorized program.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management said available capital and credit resources were expected to fund operations, debt and commitments for the next 12 months, including the planned BTI acquisition.
- On November 25, 2014, after quarter-end, the company agreed to acquire Battenfeld Technologies, a hunting and shooting accessories business, for $130.5 million in cash, subject to adjustments. It also expanded its revolving facility from $75 million to $125 million, with a further $50 million available under the accordion feature.
- Key risks include continued weak demand or elevated channel inventories, changes in economic, social, political or regulatory conditions, acquisition integration and valuation uncertainty, product liability litigation, environmental obligations, and availability of financing. The company had no foreign-exchange forward contracts outstanding.
- The company settled SEC administrative FCPA charges on July 28, 2014, neither admitting nor denying the allegations, and consented to pay $2.0 million and provide compliance reporting for two years. The DOJ had closed its separate investigation without bringing FCPA charges.
- The company reported nine product-liability cases and approximately 10 additional claims. It said it could not reasonably estimate possible material judgment losses and had not accrued for such judgments; it had reserves for defense costs. An environmental reserve of $623,000 was recorded. TTPP’s former owner indemnified certain environmental losses, with $3.0 million placed in escrow; the ultimate remediation costs and escrow use were not yet estimable.
- Management reported compliance with debt covenants at October 31, 2014 and effective disclosure controls. The company was evaluating the impact of the new revenue-recognition standard.
Important facts for investors to verify
- Whether firearm demand and distributor or retailer inventories recover, and how that affects sales mix, factory utilization and margins.
- The final purchase-price allocation and integration results for Tri Town Precision Plastics, and the completion, financing and performance of the planned BTI acquisition.
- Debt terms, covenant headroom, liquidity after the BTI transaction, and the company’s ability to meet its stated capital-spending plans.
- Developments in product-liability claims, environmental remediation and the SEC-required FCPA compliance reporting.
- The filing’s period-end figures and subsequent-event terms against the complete financial statements and acquisition disclosures.