Smith & Wesson Holding Corporation — Form 10-Q
Reporting period: Third quarter and nine months ended January 31, 2013. Financial statements are unaudited. Unless noted, figures are in millions of dollars; comparisons are with the prior-year periods.
Business context and results
The company manufactures firearms and related products. Its Security Solutions division was sold on July 26, 2012 and is reported as discontinued operations; continuing results therefore primarily reflect the firearms business.
| Metric | Three months ended Jan. 31, 2013 | Prior year | Nine months ended Jan. 31, 2013 | Prior year |
|---|---|---|---|---|
| Net sales | $136.2 | $98.1 | $408.8 | $282.2 |
| Gross profit / margin | $50.1 / 36.8% | $30.0 / 30.6% | $149.9 / 36.7% | $81.1 / 28.8% |
| Operating income from continuing operations | $28.0 | $10.3 | $86.0 | $19.2 |
| Income from continuing operations | $17.5 | $5.4 | $52.8 | $8.6 |
| Net income, including discontinued operations | $14.6 | $4.4 | $53.5 | $3.6 |
| Diluted EPS from continuing operations | $0.26 | $0.08 | $0.79 | $0.13 |
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $46.8 million, investing cash flow was negative $19.8 million, and financing cash flow was negative $21.6 million. Cash increased $5.3 million to $62.0 million, including $3.3 million of restricted cash.
- Capital expenditures were $28.4 million. Management expected full-year fiscal 2013 capital spending of $35–$40 million, principally for capacity, production efficiency, new-product tooling, manufacturing upgrades and an ERP system.
- Senior Notes outstanding were $43.6 million, bearing 9.5% interest and due January 2016. The company repurchased $6.4 million of notes during the period. It had no borrowings on its $60 million revolving credit facility, available through December 2014, and reported compliance with debt covenants.
- The company repurchased $20 million of its stock and had $15 million of additional authorization through June 30, 2013. Management said available capital and credit facilities were expected to fund operations and commitments for the next 12 months.
Material changes and management commentary
- Quarterly sales increased 38.8%; nine-month sales rose 44.9%. Growth was led by handguns and modern sporting rifles, with additional increases in hunting firearms and Walther products. Non-firearms sales declined.
- Gross margin improved as higher volumes and a shift toward polymer pistols and modern sporting rifles increased fixed-cost absorption; manufacturing efficiencies, selected price increases and favorable currency movements also contributed. Higher volume-related spending partly offset these benefits. The nine-month comparison also benefited from the absence of prior-year rifle-recall and hunting-production consolidation costs.
- At January 31, backlog was $667.8 million, up $469.3 million year over year. Management cautioned that orders may be canceled, demand exceeded manufacturing capacity, and some retailer or distributor orders could be above actual requirements and inflate backlog.
- The company recorded $0.8 million of income from discontinued operations for the nine months, but a $2.9 million discontinued-operations loss in the quarter. The quarter included a tax adjustment relating to the disposed division and a $0.4 million settlement of a working-capital adjustment.
Risks, contingencies and unusual items
- The Thompson/Center Arms Venture rifle recall remained a cost exposure: $0.7 million had been incurred and an estimated $0.9 million remained accrued at January 31, 2013. The company warns actual warranty claims and repair costs could exceed estimates.
- The company disclosed ongoing DOJ and SEC inquiries concerning potential FCPA and federal securities-law issues; it was not charged in the DOJ indictment described in the filing and said it was cooperating. Potential outcomes, costs and timing were uncertain.
- Other matters include two stockholder derivative suits, approximately 17 product-liability cases and eight additional claims, and environmental remediation obligations. The company reported a $0.6 million environmental reserve and said a reasonably possible additional litigation-loss range could not be estimated.
- Limited-source suppliers, possible future environmental requirements, and variability in consumer demand and order cancellations could affect operations. The filing also notes that results for the nine months may not indicate full-year results.
Important facts for investors to verify
- Whether production capacity can keep pace with demand and whether the reported backlog converts to shipped sales without material cancellations or excess ordering.
- Whether improved gross margins and earnings are sustainable as product mix, pricing, costs and demand change.
- Actual fiscal 2013 capital spending and the timing and cost of the ERP implementation.
- Final costs of the Venture rifle recall, discontinued-division retained liabilities, and pending legal or environmental matters.
- Cash use from any further share repurchases, debt repayments and operating needs; the company’s liquidity outlook depends on expected business conditions.