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Smith & Wesson Holding Corp Reports Operating Results (10-Q)

December 06, 2012 | About:
10qk

10qk

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Smith & Wesson Holding Corp (SWHC) filed Quarterly Report for the period ended 2012-10-31.

Smith & Wesson Holding Corporation has a market cap of $694.4 million; its shares were traded at around $10.79 with a P/E ratio of 16.6 and P/S ratio of 1.7.

Highlight of Business Operations:

Gross profit as a percentage of net sales was 35.5% for the three months ended October 31, 2012 compared with 26.7% for the three months ended October 31, 2011 due, in part, to increased sales volume of our polymer products and modern sporting rifles as well as the corresponding improvement in manufacturing fixed-cost absorption, which impacted gross profit percentage favorably by 5.7 percentage points. We also achieved process improvements from our cost reduction initiatives. In addition, gross profit was favorably impacted by 1.5 percentage points, or $2.1 million, because of reduced warranty costs associated with the recall of all Thompson/Center Arms Venture rifles manufactured since the products introduction in mid-2009 through November 11, 2011. The restructuring plan to relocate our hunting production from Rochester, New Hampshire to our Springfield, Massachusetts facility was ongoing during the three months ended October 31, 2011 and adversely impacted our gross margin percentage in that period by 1.2 percentage points, or $787,000, compared with the three months ended October 31, 2012. Finally, we had favorable currency exchange gains of 0.8 percentage points, or $1.1 million, on international purchases of products manufactured at Walther facilities as well as other one-time benefits in manufacturing spending variances that equate to the remaining gross profit percentage increase.

Net sales into our sporting goods distribution channel, excluding Walther products, were $111.0 million for the three months ended October 31, 2012, an increase of 49.0% over the comparable quarter last year, which was primarily a result of increased handgun and modern sporting rifle sales and an increase in production capacity. Net sales into our professional channels, which include federal, international, and law enforcement sales, were $15.3 million, excluding Walther products, an increase of 44.5% over the comparable quarter last year because of increased orders of polymer products and modern sporting rifles to law enforcement as well as increased international shipments to Canada and Japan.

Research and development expenses were flat compared with the prior year comparable quarter. Selling and marketing expenses were lower due to the impact of significantly reduced sample costs in the current fiscal quarter. General and administrative costs increased compared with the prior comparable quarter because of $1.8 million of additional profit sharing expense; $700,000 of increased incentive accruals; $685,000 of additional stock-based compensation expense primarily related to options, RSUs, and PSUs granted to our employees late in fiscal 2012; and $581,000 of increased bad debt expense; offset by $1.2 million of reduced legal and consulting fees, of which, $747,000 related to our investigation of the DOJ and SEC matters, and $988,000 of employee-related costs resulting from severance benefits paid to our former President and Chief Executive Officer in the prior comparable quarter. We also experienced additional costs associated with the planning of our new ERP system that is scheduled to be implemented during fiscal 2014. Operating expenses as a percentage of net sales for the three months ended October 31, 2012 decreased from the prior year comparable quarter as a result of the reduction in legal and consulting fees mentioned above, gained efficiencies from the completed move of the production of our hunting products in the prior year, and increased net sales.

Operating expenses for the six months ended October 31, 2012 decreased from the prior year comparable period and decreased as a percentage of net sales as a result of increased volume and flat spending. Research and development costs decreased primarily as a result of reduced testing and sample costs of $302,000 and consulting fees of $107,000, offset by a change in the method of allocating services to production increasing research and development by $401,000. Selling and marketing expenses decreased $1.9 million, which was largely due to the inclusion of $1.3 million of expense for sample costs in the prior fiscal year as well as a $1.3 million reduction in consulting and outside services relating to market research. General and administrative costs increased over the comparable prior period because of $2.8 million of additional profit sharing expense; $1.6 million of increased incentive accruals; $1.0 million of increased bad debt expense over $636,000 of bad debt collections in the prior comparable period; and $978,000 of additional stock-based compensation expense primarily related to options, RSUs, and PSUs granted to our employees late in fiscal 2012, offset by $2.7 million of reduced legal and consulting fees, of which, $1.8 million related to our investigation of the DOJ and SEC matters and $988,000 of employee-related costs resulting from severance benefits paid to our former President and Chief Executive Officer in the prior comparable period.

In the six months ended October 31, 2012, we generated $13.8 million in cash from operating activities, an increase of $16.3 million from the $2.5 million of cash used by operating activities in the first six months of fiscal 2012. Cash generated during the six months ended October 31, 2012 was primarily because of an increase in net income. Cash provided by operating activities was impacted by a $9.1 million reduction in income tax payable because of $21.9 million of estimated income tax payments paid during fiscal 2013, a $10.0 million increase in inventory levels because of increased parts purchases to accommodate customer demand for our polymer pistol products and modern sporting rifles, and increased accounts receivable of $6.5 million because of increased net sales volume. We paid $8.0 million of profit sharing during the six months ended October 31, 2012, which has historically been paid during our third fiscal quarter.

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