Smith & Wesson Holding Corporation Reports Third Quarter Fiscal 2014 Financial Results

- Net Sales of $145.9 Million

- Net Sales Growth of 16.7% Excluding Walther®

- Net Income from Continuing Operations Per Diluted Share Increased to $0.35 from $0.26 a Year Ago, up 34.6%

- Quarterly Gross Margin of 40.2% vs. 36.6% a Year Ago

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Mar 04, 2014, 04:05 ET

SPRINGFIELD, Mass., March 4, 2014 /PRNewswire/ -- Smith & Wesson Holding Corporation (NASDAQ Global Select: SWHC), a leader in firearm manufacturing and design, today announced financial results for the third fiscal quarter ended January 31, 2014.

Third Quarter Fiscal 2014 Financial Highlights

Net sales for the third quarter were $145.9 million, up 7.1% from the third quarter last year. When excluding Walther products that were sold in the prior year pursuant to a distribution agreement that has since ended, net sales growth was 16.7%. Handgun sales, which include sales of the company's popular M&P® pistols, grew 29.9% versus the year ago quarter.
Gross profit for the third quarter was $58.7 million, or 40.2% of net sales, compared with gross profit of $49.9 million, or 36.6% of net sales, for the comparable quarter last year. Gross profit margin improved as a result of favorable product mix, absorption, and manufacturing efficiencies, as well as reduced promotions and the absence of lower-margin Walther product sales.
Operating expenses for the third quarter were $27.5 million, or 18.9% of net sales, compared with operating expenses of $21.9 million, or 16.1% of net sales, for the third quarter last year. A significant portion of the operating expense increase related to the company's ERP implementation, which commenced in the second quarter.
Operating income for the third quarter was 21.3% of net sales compared with 20.6% for the third quarter last year.
Income from continuing operations for the third quarter was $20.1 million, or $0.35 per diluted share, compared with $17.5 million, or $0.26 per diluted share, for the third quarter last year.
Non-GAAP Adjusted EBITDAS from continuing operations for the third quarter increased to $37.5 million from $33.3 million for the third quarter last year.
Operating cash generated for the third quarter was $29.6 million. Cash used in investing activities of $21.9 million included capital spending of $10.2 million and equipment deposits of $11.7 million, yielding free cash flow of $7.6 million. The company also used $15.3 million in cash from financing activities, primarily relating to its stock buyback program.

James Debney, Smith & Wesson Holding Corporation President and Chief Executive Officer, stated, "Our performance for the third quarter of fiscal 2014 reflected the ongoing successful execution of our growth strategy. We maintained our focus on increasing market share of our Smith & Wesson® M&P® polymer pistol family of products and thereby delivered handgun revenue growth of nearly 30%, a solid result when we consider that the year-ago quarter reflected a surge in consumer demand. We continued to demonstrate our strong track record of new product development, launching several new products at SHOT Show® in January, particularly in the revolver category, all of which were well received and drew incremental orders from our customers. Our financial results were highlighted by our delivery of double-digit growth in net income and the ongoing expansion of our gross margins, all while we continued to drive a number of initiatives designed to strengthen our business and return increased value to our stockholders. We believe that our long-standing approach of growing our business through the addition of flexible capacity has positioned us well to adapt to our dynamic environment."

Jeffrey D. Buchanan, Smith & Wesson Holding Corporation Executive Vice President and Chief Financial Officer, stated, "During the third quarter, we repurchased 1.14 million shares of our common stock for $15 million. Since December 2012, we have repurchased a total of 12.3 million shares of our common stock valued at $135 million, representing a total reduction in shares outstanding of nearly 19.0%. With the successful completion of our stock buyback program, we continued to optimize our capital structure. Overall, our balance sheet remains flexible and strong with no borrowings under our credit facility."

Financial Outlook

The company estimates net sales for the fourth quarter of fiscal 2014 to be between $159.0 million and $164.0 million and GAAP earnings per diluted share from continuing operations of between $0.37 and $0.40.

The company has raised its full year fiscal 2014 guidance. It now estimates net sales of between $615.0 million and $620.0 million and GAAP earnings per diluted share from continuing operations of between $1.39 and $1.42.

All guidance takes into account the expected impact of the implementation of the company's new ERP system throughout fiscal 2014. While implementation costs are projected to continue in the fourth quarter, those costs are expected to continue to diminish from second quarter levels, since the most challenging aspects of the project have been completed and the system has reached steady-state mode.

Conference Call and Webcast

The company will host a conference call and webcast today, March 4, 2014, to discuss its third quarter fiscal 2014 financial and operational results. Speakers on the conference call will include James Debney, President and Chief Executive Officer, and Jeffrey D. Buchanan, Executive Vice President and Chief Financial Officer. The conference call may include forward-looking statements. The conference call and webcast will begin at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). Those interested in listening to the call via telephone may call directly at (617) 213-8052 and reference conference code 22615200. No RSVP is necessary. The conference call audio webcast can also be accessed live and for replay on the company's website at www.smith-wesson.com, under the Investor Relations section. The company will maintain an audio replay of this conference call on its website for a period of time after the call. No other audio replay will be available.

Reconciliation of U.S. GAAP to Non-GAAP Financial Measures

In this press release, certain non-GAAP financial measures, including "Adjusted EBITDAS" and "free cash flow" are presented. From time to time, the company considers and uses Adjusted EBITDAS and free cash flow as supplemental measures of operating performance in order to provide the reader with an improved understanding of underlying performance trends. Adjusted EBITDAS excludes the effects of interest expense, income taxes, depreciation of tangible fixed assets, amortization of intangible assets, stock-based compensation expense, plant consolidation costs, DOJ and SEC investigation costs, and certain other transactions. See the attached "Reconciliation of GAAP Income from Operations to Adjusted EBITDAS" for a detailed explanation of the amounts excluded from and included in net income to arrive at Adjusted EBITDAS for the three month and nine month periods ended January 31, 2014 and 2013. Free cash flow is defined as cash flow provided by operating activities less capital expenditures, which include purchases of property, equipment, patents, and software and deposits on fixed assets.

Adjusted or non-GAAP financial measures provide investors and the company with supplemental measures of operating performance and trends that facilitate comparisons between periods before, during, and after certain items that would not otherwise be apparent on a GAAP basis. Adjusted financial measures are not, and should not be viewed as, a substitute for GAAP results. The company's definition of these adjusted financial measures may differ from similarly named measures used by others.

About Smith & Wesson

Smith & Wesson Holding Corporation (NASDAQ Global Select: SWHC) is a U.S.-based leader in firearm manufacturing and design, delivering a broad portfolio of quality firearms, related products, and training to the global military, law enforcement, and consumer markets. The company's brands include Smith & Wesson®, M&P® and Thompson/Center Arms™. Smith & Wesson facilities are located in Massachusetts and Maine. For more information on Smith & Wesson, call (800) 331-0852 or log on to www.smith-wesson.com.

Safe Harbor Statement

Certain statements contained in this press release may be deemed to be forward-looking statements under federal securities laws, and we intend that such forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements include the company's belief that its performance for the third quarter of fiscal 2014 reflected the ongoing successful execution of its growth strategy; the company's belief that it maintained its focus on increasing market share of its M&P polymer pistol family of products and thereby delivered handgun revenue growth of nearly 30%, a solid result when the year-ago quarter reflected a surge in consumer demand; the company's belief that it continued to demonstrate its strong track record of new product development, launching several new products at SHOT Show in January, particularly in the revolver category, all of which were well received and drew incremental orders from its customers; the company's belief that it continued to drive a number of initiatives designed to strengthen its business and return increased value to its stockholders; the company's belief that its long-standing approach of growing its business through the addition of flexible capacity positioned it well to adapt to its dynamic environment; the company's belief that with the successful completion of its stock buyback program, it continued to optimize its capital structure; the company's belief that its balance sheet remains flexible and strong with no borrowings under its credit facility; the company's expectations for net sales and GAAP earnings per diluted share from continuing operations for the fourth quarter of fiscal 2014; the company's expectations for net sales and GAAP earnings per diluted share from continuing operations for fiscal 2014; and the company's belief that while implementation costs for the company's new ERP system are expected to continue in the fourth quarter, those costs are expected to continue to diminish from second quarter levels, since the most challenging aspects of the project have been completed and the system has reached steady-state mode. We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by such forward-looking statements. Such factors include the demand for our products; the costs and ultimate conclusion of certain legal matters, including the DOJ and SEC matters; the state of the U.S. economy; general economic conditions and consumer spending patterns; the potential for increased regulation of firearms and firearm-related products; speculation surrounding fears of terrorism and crime; our growth opportunities; our anticipated growth; our ability to increase demand for our products in various markets, including consumer, law enforcement, and military channels, domestically and internationally; the position of our hunting products in the consumer discretionary marketplace and distribution channel; our penetration rates in new and existing markets; our strategies; our ability to introduce new products; the success of new products; our ability to expand our markets; the potential for cancellation of orders from our backlog; and other risks detailed from time to time in our reports filed with the SEC, including our Form 10-K Report for the fiscal year ended April 30, 2013.

Contact: Liz Sharp, VP Investor Relations
Smith & Wesson Holding Corporation
(413) 747-3304
[email protected]

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

		For the Three Months Ended:				For the Nine Months Ended:
		January 31, 2014		January 31, 2013		January 31, 2014		January 31, 2013
		(In thousands, except per share data)
Net sales		$	145,881	$	136,242	$	456,195	$	408,797
Cost of sales			87,230		86,310		266,834		259,171
Gross profit			58,651		49,932		189,361		149,626
Operating expenses:
	Research and development		1,456		952		4,119		3,392
	Selling and marketing		8,921		8,356		24,150		23,272
	General and administrative		17,154		12,576		53,184		36,994
	Total operating expenses		27,531		21,884		81,453		63,658
Operating income from continuing operations			31,120		28,048		107,908		85,968
Other income/(expense):
	Other income/(expense), net		(6)		-		35		39
	Interest income		33		48		143		750
	Interest expense		(1,771)		(1,240)		(10,490)		(4,571)
	Total other income/(expense), net		(1,744)		(1,192)		(10,312)		(3,782)
Income from continuing operations before income taxes			29,376		26,856		97,596		82,186
Income tax expense			9,319		9,350		33,868		29,410
Income from continuing operations			20,057		17,506		63,728		52,776
Discontinued operations:
	Loss from operations of discontinued security solutions division		(75)		(601)		(349)		(3,150)
	Income tax expense/(benefit)		(803)		2,329		(870)		(3,921)
	Income/(loss) from discontinued operations		728		(2,930)		521		771
Net income/comprehensive income		$	20,785	$	14,576	$	64,249	$	53,547

Net income per share:
	Basic - continuing operations	$	0.36	$	0.27	$	1.07	$	0.81
	Basic - net income	$	0.37	$	0.22	$	1.07	$	0.82
	Diluted - continuing operations	$	0.35	$	0.26	$	1.03	$	0.79
	Diluted - net income	$	0.36	$	0.22	$	1.04	$	0.80
Weighted average number of common shares outstanding:
	Basic		55,583		65,149		59,815		65,457
	Diluted		57,024		66,421		62,065		66,909

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)


				As of:
				January 31, 2014		April 30, 2013
				(In thousands, except par value and share data)
ASSETS
Current assets:
		Cash and cash equivalents, including restricted cash of $3,345 on April 30, 2013		$	45,288	$	100,487
		Accounts receivable, net of allowance for doubtful accounts of $1,269 on January 31, 2014 and $1,128 on April 30, 2013			52,662		46,088
		Inventories			86,807		62,998
		Prepaid expenses and other current assets			6,693		4,824
		Deferred income taxes			12,076		12,076
		Income tax receivable			8,669		3,093
			Total current assets		212,195		229,566
Property, plant, and equipment, net					108,740		86,382
Intangibles, net					3,511		3,965
Other assets					21,656		7,076
				$	346,102	$	326,989


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
		Accounts payable		$	45,377	$	31,220
		Accrued expenses			10,829		16,033
		Accrued payroll			12,013		13,096
		Accrued taxes other than income			5,362		5,349
		Accrued profit sharing			7,688		9,587
		Accrued product/municipal liability			1,355		1,551
		Accrued warranty			5,274		5,757
		Current portion of notes payable			319		—
			Total current liabilities		88,217		82,593
Deferred income taxes					7,863		7,863
Notes payable, net of current portion					100,000		43,559
Other non-current liabilities					11,099		11,675
			Total liabilities		207,179		145,690
Commitments and contingencies
Stockholders' equity:
	Preferred stock, $.001 par value, 20,000,000 shares authorized, no shares issued or outstanding				—		—
	Common stock, $.001 par value, 100,000,000 shares authorized, 68,375,833 shares issued and 54,918,526 shares outstanding on January 31, 2014 and 67,596,716 shares issued and 64,297,113 shares outstanding on April 30, 2013				68		68
	Additional paid-in capital				208,382		199,120
	Retained earnings				72,683		8,434
	Accumulated other comprehensive income				73		73
	Treasury stock, at cost (13,457,307 common shares on January 31, 2014 and 3,299,603 common shares on April 30, 2013)				(142,283)		(26,396)
			Total stockholders' equity		138,923		181,299
				$	346,102	$	326,989

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

				For the Nine Months Ended:
				January 31, 2014		January 31, 2013
				(In thousands)
Cash flows from operating activities:
	Net Income			$	64,249	$	53,547
	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization and depreciation			16,066		12,023
		Loss on sale of business including loss on sale of discontinued operations, including $45 of stock-based compensation expense			—		1,222
		Loss on sale/disposition of assets			52		277
		Provisions for losses on accounts receivable			80		378
		Change in disposal group assets and liabilities			—		(1,215)
		Stock-based compensation expense			6,651		3,086
		Changes in operating assets and liabilities:
		Accounts receivable			(6,654)		9,064
		Inventories			(23,809)		(13,912)
		Prepaid expenses and other current assets			(1,869)		(1,150)
		Income tax receivable			(5,576)		(6,091)
		Accounts payable			14,157		(4,241)
		Accrued payroll			(1,083)		1,867
		Accrued taxes other than income			13		589
		Accrued profit sharing			(1,899)		(909)
		Accrued other expenses			(5,204)		(7,795)
		Accrued product/municipal liability			(196)		120
		Accrued warranty			(483)		(335)
		Other assets			(141)		(45)
		Other non-current liabilities			(129)		284
			Net cash provided by operating activities		54,225		46,764
Cash flows from investing activities:
	Proceeds from sale of business				—		7,500
	Deposits on machinery and equipment				(12,415)		—
	Receipts from note receivable				57		55
	Payments to acquire patents and software				(135)		(36)
	Proceeds from sale of property and equipment				101		1,037
	Payments to acquire property and equipment				(36,283)		(28,399)
			Net cash used in investing activities		(48,675)		(19,843)
Cash flows from financing activities:
	Proceeds from loans and notes payable				101,584		1,753
	Cash paid for debt issue costs				(3,786)		—
	Payments on capital lease obligation				(447)		(450)
	Payments on loans and notes payable				(44,824)		(8,034)
	Payments to acquire treasury stock				(115,887)		(20,000)
	Proceeds from exercise of options to acquire common stock, including employee stock purchase plan				2,026		4,095
	Taxes paid related to restricted stock issuance				(1,087)		—
	Excess tax benefit of stock-based compensation				1,672		997
			Net cash used in financing activities		(60,749)		(21,639)
Net (decrease)/increase in cash and cash equivalents					(55,199)		5,282
Cash and cash equivalents, beginning of period					100,487		56,717
Cash and cash equivalents, end of period				$	45,288	$	61,999
Supplemental disclosure of cash flow information
	Cash paid for:
		Interest		$	7,615	$	5,252
		Income taxes			38,130		30,976

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
RECONCILIATION OF GAAP INCOME FROM OPERATIONS TO ADJUSTED EBITDAS (Unaudited)

	For the Three Months Ended January 31, 2014:						For the Three Months Ended January 31, 2013:

	Continuing		Discontinued		Total		Continuing		Discontinued		Total

Income from operations	$	20,057	$	728	$	20,785	$	17,506	$	(2,930)	$	14,576
Interest expense		1,771		-		1,771		1,240		-		1,240
Income tax expense		9,319		(803)		8,516		9,350		2,329		11,679
Depreciation and amortization		4,673		-		4,673		3,825		-		3,825
Stock compensation expense		1,877		-		1,877		1,180		-		1,180
Loss on sale of discontinued operations		-		-		-		-		424		424
DOJ/SEC costs		(237)		-		(237)		221		-		221
Adjusted EBITDAS	$	37,460	$	(75)	$	37,385	$	33,322	$	(177)	$	33,145


	For the Nine Months Ended January 31, 2014:						For the Nine Months Ended January 31, 2013:

	Continuing		Discontinued		Total		Continuing		Discontinued		Total

Income from operations	$	63,728	$	521	$	64,249	$	52,776	$	771	$	53,547
Interest expense		10,490		-		10,490		3,963		608		4,571
Income tax expense		33,868		(870)		32,998		29,410		(3,921)		25,489
Depreciation and amortization		14,363		-		14,363		11,465		-		11,465
Stock compensation expense		6,651		-		6,651		3,109		(22)		3,087
Loss on sale of discontinued operations		-		-		-		-		1,222		1,222
DOJ/SEC costs		445		-		445		766		-		766
Adjusted EBITDAS	$	129,545	$	(349)	$	129,196	$	101,489	$	(1,342)	$	100,147

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
RECONCILIATION OF FREE CASH FLOW (Unaudited)

	For the Three Months Ended:				For the Nine Months Ended:
	January 31, 2014		January 31, 2013		January 31, 2014		January 31, 2013
	(In thousands)				(In thousands)
Cash provided by operating activities	$	29,566	$	32,993	$	54,225	$	46,764
Deposits on machinery and equipment		(11,739)		—		(12,415)		—
Payments to acquire patents and equipment		(54)		(14)		(135)		(36)
Payments to acquire property and equipment		(10,208)		(12,563)		(36,283)		(28,399)
Total free cash flow	$	7,565	$	20,416	$	5,392	$	18,329