Smith & Wesson Holding Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, the three months ended July 31, 2011; comparative results are for the three months ended July 31, 2010. The interim financial statements are unaudited. The company manufactures firearms and related products and provides perimeter security solutions.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $99.2 million | $94.9 million |
| Gross profit / margin | $28.1 million / 28.4% | $32.2 million / 34.0% |
| Operating income / margin | $3.2 million / 3.2% | $6.6 million / 7.0% |
| Net income | $0.8 million; $0.01 per diluted share | $6.2 million; $0.10 per diluted share |
| Cash from operations | $(15.3) million | $(11.9) million |
| Cash from investing | $(5.0) million | $(2.3) million |
Firearm sales increased 18.0% to $91.7 million, while security solutions sales fell 56.4% to $7.5 million. Gross margin declined amid lower average selling prices and hunting-line relocation costs. Total operating expenses fell 2.6% to $25.0 million, but operating income declined 52.3%. Net income fell 87.3%, reflecting relocation-related costs and inefficiencies, product mix and pricing, higher interest expense, and the absence of prior-year one-time other income.
Cash, liquidity and debt
- Cash and cash equivalents were $37.7 million at July 31, including $5.8 million of restricted cash. Cash declined $20.6 million during the quarter.
- Current assets were $194.5 million and current liabilities $112.3 million. Inventory was $57.6 million, up from $51.7 million at April 30.
- Notes payable totaled $81.1 million: $31.1 million current and $50.0 million long-term. The $31.1 million current balance includes $30.0 million of 4% convertible notes, which holders may require the company to repurchase in December 2011. Management expects to fund repayment with cash or revolver borrowings.
- The company had a $120 million revolving credit facility and reported compliance with debt covenants. The filing states no short-term bank borrowings at quarter-end. Senior notes of $50 million bear 9.5% interest and mature in 2016.
- Capital expenditures were $5.1 million. Management expected fiscal 2012 capital expenditures of approximately $14.9 million.
Changes, outlook and notable items
- Firearm demand benefited from handguns, including BODYGUARD and Sigma products, and modern sporting rifles. Handgun sales rose 26.6% and modern sporting rifle sales 114.4%. Walther sales fell 34.4%; hunting firearm sales fell 23.5%.
- Security solutions sales were pressured by reduced or delayed federal spending. Firearm backlog was $148.8 million; total company backlog was $168.7 million, down $37.9 million from April 30, primarily due to seasonality and order fulfillment.
- The company was consolidating hunting production from Rochester, New Hampshire, to Springfield, Massachusetts, with completion expected by November 2011. It recorded $1.6 million of related expenses in the quarter, expected another $2.2 million during the remainder of fiscal 2012, and estimated total plan costs of $6.4 million.
- Management said seasonal working-capital use is typical in the first fiscal quarter and believed existing capital resources and credit facilities would fund operations and commitments for the next 12 months, apart from major acquisitions. It expected the effective tax rate to remain stable; no full-year earnings guidance was provided.
- Other income was only $34,000, versus $3.0 million in the prior-year quarter, which included a $2.5 million contingent-consideration valuation adjustment and $499,000 of unrealized foreign-exchange gains. Interest expense rose 65.8% to $1.9 million, largely due to replacing 4% convertible debt with 9.5% senior notes.
Risks and contingencies
- DOJ investigation into potential Foreign Corrupt Practices Act violations and a separate SEC inquiry remained unresolved. The company said it was cooperating; outcomes, timing, and potential penalties or business effects were uncertain.
- Product-liability and other litigation continued. The company said an estimate of reasonably possible additional losses could not be made; claimed amounts exceed recorded product-liability accruals and, where applicable, insurance coverage.
- Environmental remediation reserves were $2.1 million. Management did not expect current environmental matters to have a material adverse effect, but noted uncertainty around future requirements and costs.
- Limited-source suppliers, seasonal demand, production-transfer execution, federal budget constraints, and possible higher-than-estimated warranty or self-insurance costs could affect results.
- The filing reports effective disclosure controls and no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether the company repaid or refinanced the $30 million convertible notes when holders’ repurchase right arose in December 2011, and the effect on cash, borrowing, and interest expense.
- Whether firearm demand and backlog converted into shipments and margin, and whether production consolidation finished on schedule and within the stated cost estimate.
- Whether security-solutions demand recovered from federal spending constraints and whether that segment’s operating losses narrowed.
- Developments and any financial consequences from the DOJ and SEC inquiries, litigation, and environmental remediation.
- The filing gives inconsistent remaining convertible-note conversion share counts in different sections (2,431,906 and 2,341,906); verify the correct figure in subsequent disclosures.