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EXCEL - IDEA: XBRL DOCUMENT - AMERICAN OUTDOOR BRANDS CORPFinancial_Report.xls
EX-32.1 - EX-32.1 - AMERICAN OUTDOOR BRANDS CORPswhc-ex321_201410319.htm
EX-32.2 - EX-32.2 - AMERICAN OUTDOOR BRANDS CORPswhc-ex322_201410316.htm
EX-31.1 - EX-31.1 - AMERICAN OUTDOOR BRANDS CORPswhc-ex311_201410318.htm
EX-31.2 - EX-31.2 - AMERICAN OUTDOOR BRANDS CORPswhc-ex312_201410317.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2014

Commission File No. 001-31552

 

Smith & Wesson Holding Corporation

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

87-0543688

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2100 Roosevelt Avenue

Springfield, Massachusetts

 

01104

(Address of principal executive offices)

 

(Zip Code)

(800) 331-0852

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The registrant had 53,704,558 shares of common stock, par value $0.001, outstanding as of December 1, 2014.

 

 

 

 

 


SMITH & WESSON HOLDING CORPORATION

Quarterly Report on Form 10-Q

For the Three and Six Months Ended October 31, 2014

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

1

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

14

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

21

 

Item 4. Controls and Procedures

  

21

 

 

 

 

PART II - OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

22

 

Item 6. Exhibits

  

22

Signatures

  

23

EX-2.9

 

 

EX-10.104(a)

 

EX-31.1

  

 

EX-31.2

  

 

EX-32.1

  

 

EX-32.2

  

 

EX-101 INSTANCE DOCUMENT

 

EX-101 SCHEMA DOCUMENT

 

EX-101 CALCULATION LINKBASE DOCUMENT

 

EX-101 DEFINITION LINKBASE DOCUMENT

 

EX-101 LABEL LINKBASE DOCUMENT

 

EX-101 PRESENTATION LINKBASE DOCUMENT

 

 

 

 


Statement Regarding Forward-Looking Information

 

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of applicable securities laws. Forward-looking statements include statements regarding our “expectations,” “anticipations,” “intentions,” “beliefs,” or “strategies” regarding the future. Forward-looking statements also include statements regarding the timing and completion of our acquisition of Battenfeld Technologies, Inc., or BTI; the impact, if any, of recently issued accounting standards on our consolidated financial statements; our ability to integrate the assets we acquired from a custom polymer injection molding supplier in a successful manner; estimates of fair value and the potential for recasting amounts allocated to goodwill; the outcome of the litigation to which we are subject and its effect on us; the amount of environmental and other reserves; BTI’s ability to continue to launch high-quality, innovative products; the impact of lower consumer demand and excess distributor and retailer inventories in the firearm industry; the effect of a variety of economic, social, and political factors on our business; the features and performance of our products; the success of particular product or marketing programs; future investments for capital expenditures; and liquidity and anticipated cash needs and availability. All forward-looking statements included in this report are based on information available to us as of the filing date of this report, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from the forward-looking statements. Among the factors that could cause actual results to differ materially are the factors discussed under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended April 30, 2014, filed with the Securities and Exchange Commission, or the SEC, on June 19, 2014.

 

 

 


PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

As of:

 

 

October 31, 2014

 

 

April 30, 2014

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

64,373

 

 

$

68,860

 

Accounts receivable, net of allowance for doubtful accounts of $947 on October

   31, 2014 and $844 on April 30, 2014

 

51,411

 

 

 

55,890

 

Inventories

 

99,243

 

 

 

86,742

 

Prepaid expenses and other current assets

 

8,744

 

 

 

5,958

 

Deferred income taxes

 

16,917

 

 

 

17,094

 

Income tax receivable

 

4,230

 

 

 

4,627

 

Total current assets

 

244,918

 

 

 

239,171

 

Property, plant, and equipment, net

 

134,027

 

 

 

120,440

 

Intangibles, net

 

3,891

 

 

 

3,425

 

Goodwill

 

14,110

 

 

 

 

Other assets

 

19,043

 

 

 

18,467

 

 

$

415,989

 

 

$

381,503

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

23,852

 

 

$

37,688

 

Accrued expenses

 

15,112

 

 

 

16,051

 

Accrued payroll

 

7,165

 

 

 

15,816

 

Accrued taxes other than income

 

4,371

 

 

 

5,359

 

Accrued profit sharing

 

2,500

 

 

 

11,060

 

Accrued product/municipal liability

 

965

 

 

 

1,056

 

Accrued warranty

 

5,054

 

 

 

5,513

 

Total current liabilities

 

59,019

 

 

 

92,543

 

Deferred income taxes

 

11,241

 

 

 

11,418

 

Notes payable

 

175,000

 

 

 

100,000

 

Other non-current liabilities

 

11,017

 

 

 

10,719

 

Total liabilities

 

256,277

 

 

 

214,680

 

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, 69,264,706 shares

   issued and 53,702,084 shares outstanding on October 31, 2014 and

   68,809,986 shares issued and 55,352,679 shares outstanding on April 30, 2014

 

69

 

 

 

69

 

Additional paid-in capital

 

214,548

 

 

 

211,225

 

Retained earnings

 

117,345

 

 

 

97,739

 

Accumulated other comprehensive income

 

73

 

 

 

73

 

Treasury stock, at cost (15,562,622 common shares on October 31, 2014 and

   13,457,307 common shares on April 30, 2014)

 

(172,323

)

 

 

(142,283

)

Total stockholders’ equity

 

159,712

 

 

 

166,823

 

 

$

415,989

 

 

$

381,503

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

1


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For the Three Months Ended:

 

 

For the Six Months Ended:

 

 

 

(In thousands, except per share data)

 

 

 

October 31, 2014

 

 

October 31, 2013

 

 

October 31, 2014

 

 

October 31, 2013

 

Net sales

 

$

108,446

 

 

$

139,294

 

 

$

240,315

 

 

$

310,314

 

Cost of sales

 

 

73,606

 

 

 

81,357

 

 

 

156,357

 

 

 

179,604

 

Gross profit

 

 

34,840

 

 

 

57,937

 

 

 

83,958

 

 

 

130,710

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,473

 

 

 

1,305

 

 

 

2,929

 

 

 

2,664

 

Selling and marketing

 

 

8,850

 

 

 

7,681

 

 

 

16,797

 

 

 

15,229

 

General and administrative

 

 

13,682

 

 

 

20,177

 

 

 

27,627

 

 

 

36,029

 

Total operating expenses

 

 

24,005

 

 

 

29,163

 

 

 

47,353

 

 

 

53,922

 

Operating income

 

 

10,835

 

 

 

28,774

 

 

 

36,605

 

 

 

76,788

 

Other (expense)/income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense)/income, net

 

 

(11

)

 

 

36

 

 

 

(17

)

 

 

41

 

Interest income

 

 

20

 

 

 

8

 

 

 

44

 

 

 

110

 

Interest expense

 

 

(2,914

)

 

 

(2,046

)

 

 

(4,898

)

 

 

(8,719

)

Total other (expense)/income, net

 

 

(2,905

)

 

 

(2,002

)

 

 

(4,871

)

 

 

(8,568

)

Income from continuing operations before income taxes

 

 

7,930

 

 

 

26,772

 

 

 

31,734

 

 

 

68,220

 

Income tax expense

 

 

2,839

 

 

 

9,627

 

 

 

12,026

 

 

 

24,549

 

Income from continuing operations

 

 

5,091

 

 

 

17,145

 

 

 

19,708

 

 

 

43,671

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations of discontinued security solutions division

 

 

(61

)

 

 

(222

)

 

 

(156

)

 

 

(274

)

Income tax benefit

 

 

(20

)

 

 

(64

)

 

 

(54

)

 

 

(66

)

Loss from discontinued operations

 

 

(41

)

 

 

(158

)

 

 

(102

)

 

 

(208

)

Net income

 

$

5,050

 

 

$

16,987

 

 

$

19,606

 

 

$

43,463

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic - continuing operations

 

$

0.10

 

 

$

0.29

 

 

$

0.36

 

 

$

0.71

 

Basic - total

 

$

0.09

 

 

$

0.28

 

 

$

0.36

 

 

$

0.70

 

Diluted - continuing operations

 

$

0.09

 

 

$

0.28

 

 

$

0.36

 

 

$

0.69

 

Diluted - total

 

$

0.09

 

 

$

0.28

 

 

$

0.35

 

 

$

0.68

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

53,545

 

 

 

59,620

 

 

 

54,188

 

 

 

61,931

 

Diluted

 

 

54,651

 

 

 

60,984

 

 

 

55,435

 

 

 

63,751

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

2


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Stockholders’

 

(In thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance at April 30, 2014

 

 

68,810

 

 

$

69

 

 

$

211,225

 

 

$

97,739

 

 

$

73

 

 

 

13,458

 

 

$

(142,283

)

 

$

166,823

 

Exercise of employee stock options

 

167

 

 

 

 

 

796

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

796

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,105

 

 

 

(30,040

)

 

 

(30,040

)

Stock-based compensation

 

 

 

 

 

 

 

 

2,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,801

 

Excess tax benefit for stock-based compensation

 

 

 

 

 

 

 

 

197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

197

 

Shares issued under employee stock purchase

   plan

 

79

 

 

 

 

 

636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

636

 

Issuance of common stock under restricted stock

   unit awards, net of shares surrendered

 

209

 

 

 

 

 

 

(1,107

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,107

)

Net income

 

 

 

 

 

 

 

 

 

 

19,606

 

 

 

 

 

 

 

 

 

 

 

 

19,606

 

Balance at October 31, 2014

 

 

69,265

 

 

$

69

 

 

$

214,548

 

 

$

117,345

 

 

$

73

 

 

 

15,563

 

 

$

(172,323

)

 

$

159,712

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

3


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

For the Six Months Ended

 

 

October 31, 2014

 

 

October 31, 2013

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

19,606

 

 

$

43,463

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Amortization and depreciation

 

12,983

 

 

 

11,152

 

(Gain)/loss on sale/disposition of assets

 

(86

)

 

 

77

 

Provision for losses on accounts receivable

 

230

 

 

 

33

 

Stock-based compensation expense

 

2,801

 

 

 

4,774

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

6,873

 

 

 

(22,466

)

Inventories

 

(9,622

)

 

 

(13,263

)

Prepaid expenses and other current assets

 

(2,786

)

 

 

(1,836

)

Income tax receivable/(payable)

 

397

 

 

 

(6,099

)

Accounts payable

 

(14,206

)

 

 

14,602

 

Accrued payroll

 

(9,012

)

 

 

(1,587

)

Accrued taxes other than income

 

(988

)

 

 

1,153

 

Accrued profit sharing

 

(8,560

)

 

 

(4,313

)

Accrued expenses

 

(967

)

 

 

(373

)

Accrued product/municipal liability

 

(91

)

 

 

(57

)

Accrued warranty

 

(459

)

 

 

(166

)

Other assets

 

(137

)

 

 

(781

)

Other non-current liabilities

 

596

 

 

 

(330

)

Net cash (used in)/provided by operating activities

 

(3,428

)

 

 

23,983

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments for the net assets of Tri Town Precision Plastics, Inc.

 

(24,095

)

 

 

 

Refunds of deposits for machinery and equipment

 

1,204

 

 

 

 

Receipts from note receivable

 

40

 

 

 

38

 

Payments to acquire patents and software

 

(84

)

 

 

(81

)

Proceeds from sale of property and equipment

 

225

 

 

 

15

 

Payments to acquire property and equipment

 

(21,200

)

 

 

(26,075

)

Net cash used in investing activities

 

(43,910

)

 

 

(26,103

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from loans and notes payable

 

75,000

 

 

 

101,583

 

Cash paid for debt issue costs

 

(2,333

)

 

 

(3,770

)

Payments on capital lease obligation

 

(298

)

 

 

(349

)

Payments on loans and notes payable

 

 

 

 

(44,354

)

Payments to acquire treasury stock

 

(30,040

)

 

 

(100,848

)

Proceeds from exercise of options to acquire common stock, including employee stock

   purchase plan

 

1,432

 

 

 

1,689

 

Payroll taxes paid as a result of restricted stock unit withholdings

 

(1,107

)

 

 

(791

)

Excess tax benefit of stock-based compensation

 

197

 

 

 

1,395

 

Net cash provided by/(used in)financing activities

 

42,851

 

 

 

(45,445

)

Net decrease in cash and cash equivalents

 

(4,487

)

 

 

(47,565

)

Cash and cash equivalents, beginning of period

 

68,860

 

 

 

100,487

 

Cash and cash equivalents, end of period

$

64,373

 

 

$

52,922

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

$

3,106

 

 

$

4,600

 

Income taxes

 

11,682

 

 

 

29,157

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2014 and 2013

 

(1) Organization:

We are one of the world’s leading manufacturers of firearms. We manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting, bolt action, and single shot rifles), handcuffs, and firearm-related products and accessories for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We are one of the largest manufacturers of handguns, modern sporting rifles, and handcuffs in the United States and an active participant in the hunting rifle market. We sell our products under the Smith & Wesson®, M&P®, and Thompson/Center ArmsTM brands.

We manufacture our firearm products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We plan to continue to offer products that leverage the over 160 year old “Smith & Wesson” brand and capitalize on the goodwill developed through our historic American tradition by expanding consumer awareness of the products we produce.

On May 5, 2014, we purchased substantially all of the net assets of Tri Town Precision Plastics, Inc., or TTPP. See note 3 – Asset Purchase below for more information regarding this transaction.

On November 25, 2014, we entered into a definitive agreement to acquire all the outstanding stock of Battenfeld Acquisition Company Inc., including its wholly owned subsidiary, Battenfeld Technologies, Inc., or BTI. See note 8 – Subsequent Events below for more information regarding this transaction.

 

(2) Basis of Presentation:

Interim Financial Information - The consolidated balance sheet as of October 31, 2014, the consolidated statements of income for the three and six months ended October 31, 2014 and 2013, the consolidated statement of changes in stockholders’ equity for the six months ended October 31, 2014, and the consolidated statements of cash flows for the six months ended October 31, 2014 and 2013 have been prepared by us and are unaudited. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows at October 31, 2014 and for the periods presented, have been included. All significant intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2014 has been derived from our audited consolidated financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2014, filed with the SEC on June 19, 2014. The results of operations for the six months ended October 31, 2014 may not be indicative of the results that may be expected for the year ending April 30, 2015, or any other period.

Discontinued Operations - SWSS LLC, formerly Smith & Wesson Security Solutions, Inc., or SWSS, our former security solutions division, is presented as discontinued operations in the consolidated statements of income for all periods presented. Unless stated otherwise, any reference to the consolidated statements of income items in the notes to the consolidated financial statements refers to results from continuing operations.

Recently Issued Accounting Standards – In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for interim reporting periods beginning October 1, 2017. Early adoption is not permitted. We are currently evaluating the impact, if any, that ASU 2014-09 will have on our consolidated financial statements.

 

(3) Asset Purchase:

On May 5, 2014, we acquired substantially all of the net assets of TTPP for $24.1 million, including a $1.3 million working capital adjustment. We recorded this transaction in accordance with ASC 805-20, Business Combinations. TTPP was a provider of custom injection molding services, rapid prototyping and tooling, and was a long-standing supplier of polymer frames and related components for a large number of our firearms, including nearly all of our M&P models. Our acquisition of TTPP’s custom polymer

5


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2014 and 2013

 

injection molding capabilities was designed to vertically integrate a key component of our manufacturing operations providing us with increased flexibility within our supply chain.

The initial estimated fair value asset and liability allocations made at the acquisition date were adjusted during the six months ended October 31, 2014 for inventory valuation and payroll accruals. We also recorded identifiable intangible assets relating to customer relationships and order backlog during the six months ended October 31, 2014. Additional information that existed as of the acquisition date but at that time was unknown may become known to us during the remainder of the measurement period, which will not exceed 12 months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred.

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed at the acquisition date, as well as measurement period adjustments as described above (in thousands):

 

 

May 5, 2014 (As

 

 

Measurement

 

 

 

 

 

 

Initially

 

 

Period

 

 

October 31, 2014

 

 

Reported)

 

 

Adjustments

 

 

(As Adjusted)

 

Accounts receivable

$

2,614

 

 

$

10

 

 

$

2,624

 

Inventories

 

2,430

 

 

 

449

 

 

 

2,879

 

Total current assets

 

5,044

 

 

 

459

 

 

 

5,503

 

Property, plant, and equipment

 

4,243

 

 

 

 

 

4,243

 

Goodwill

 

15,183

 

 

 

(1,073

)

 

 

14,110

 

Intangibles assets:

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

 

840

 

 

 

840

 

Order backlog

 

 

 

150

 

 

 

150

 

Other assets

 

8

 

 

 

 

 

8

 

Total assets acquired

 

24,478

 

 

 

376

 

 

 

24,854

 

Accounts payable

 

358

 

 

 

12

 

 

 

370

 

Accrued expenses

 

25

 

 

 

3

 

 

 

28

 

Accrued payroll

 

 

 

361

 

 

 

361

 

Total liabilities assumed

 

383

 

 

 

376

 

 

 

759

 

 

$

24,095

 

 

$

 

 

$

24,095

 

 

Included in general and administrative costs is $442,000 of acquisition-related costs incurred during the six months ended October 31, 2014 related to the TTPP asset acquisition.

Goodwill will be deductible for tax purposes and amortized over 15 years.

We amortize customer relationships in proportion to expected yearly revenue generated from the customer lists acquired or products to be sold. We amortize order backlog over the contract lives as they are executed. The following are the identifiable intangible assets acquired and their respective estimated lives (dollars in thousands):

 

 

 

 

 

 

Estimated Life

 

 

Amount

 

 

(In years)

 

Customer relationships

$

840

 

 

 

7.0

 

Order backlog

 

150

 

 

 

1.0

 

 

$

990

 

 

 

 

 

 

Pro forma results of operations assuming that this acquisition had occurred on May 1, 2013 are not required because of the immaterial impact on our consolidated financial statements for all periods presented.

 

(4) Notes Payable and Financing Arrangements:

Credit Facilities — As of October 31, 2014, we had a $75.0 million unsecured revolving credit facility that is expandable under an accordion feature that may be, in certain circumstances, increased in $25.0 million increments up to a maximum loan of $175.0 million. The credit facility matures on December 15, 2016 and bears interest at a variable rate equal to LIBOR or prime, at our

6


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2014 and 2013

 

election, plus an applicable margin based on our consolidated leverage ratio. As of October 31, 2014, there were no borrowings outstanding. Had there been borrowings, they would have borne an interest rate of 4.00% per annum if we had selected the prime rate option and a range of 1.90% to 2.07% per annum if we had selected the LIBOR rate option.

On November 25, 2014, we amended our credit agreement with our lenders to expand our revolving credit facility to $125.0 million, in connection with entering into a definitive agreement to acquire BTI, leaving $50.0 million available under the accordion feature noted above. See Note 8 – Subsequent Events for more information regarding these transactions.

5.875% Senior Notes — During fiscal 2014, we issued an aggregate of $47.1 million of 5.875% Senior Notes due 2017, or the 5.875% Senior Notes, to various qualified institutional buyers in exchange for approximately $42.8 million of our outstanding 9.5% senior notes due 2016, or the 9.5% Senior Notes, from existing holders of such notes. We also issued an additional $52.9 million of new 5.875% Senior Notes for cash. The remaining $712,000 of 9.5% Senior Notes outstanding after the exchange noted above were extinguished via legal defeasance during fiscal 2014. The 5.875% Senior Notes were sold pursuant to the terms and conditions of an indenture, or the 5.875% Senior Notes Indenture, and exchange and purchase agreements. The 5.875% Senior Notes bear interest at a rate of 5.875% per annum payable on June 15 and December 15 of each year, beginning on December 15, 2013. We recorded $4.3 million of interest expense related to bond premium and $795,000 of debt issuance write-off costs relating to the exchange and defeasance of the 9.5% Senior Notes during fiscal 2014.

At any time prior to June 15, 2015, we may, at our option, (a) upon not less than 30 nor more than 60 days’ prior notice, redeem all or a portion of the 5.875% Senior Notes at a redemption price of 100% of the principal amount of the 5.875% Senior Notes, plus an applicable premium, plus accrued and unpaid interest as of the redemption date; or (b) redeem up to 35% of the aggregate principal amount of the 5.875% Senior Notes with the net cash proceeds of one or more equity offerings at a redemption price of 105.875% of the principal amount of the 5.875% Senior Notes, plus accrued and unpaid interest as of the redemption date; provided that in the case of the foregoing clause, at least 65% of the aggregate original principal amount of the 5.875% Senior Notes remains outstanding, and the redemption occurs within 60 days after the closing of the equity offering. On and after June 15, 2015, we may, at our option, upon not less than 30 nor more than 60 days prior notice, redeem all or a portion of the 5.875% Senior Notes at a redemption price of (a) 102.9375% of the principal amount of the 5.875% Senior Notes to be redeemed, if redeemed during the 12-month period beginning on June 15, 2015; or (b) 100% of the principal amount of the 5.875% Senior Notes to be redeemed, if redeemed during the 12-month period beginning on June 15, 2016, plus, in either case, accrued and unpaid interest on the 5.875% Senior Notes as of the applicable redemption date. Subject to certain restrictions and conditions, we may be required to make an offer to repurchase the 5.875% Senior Notes in connection with a change of control or disposition of assets. If not redeemed by us or repaid pursuant to the holders’ right to require repurchase, the 5.875% Senior Notes mature on June 15, 2017.

The 5.875% Senior Notes are general, unsecured obligations of our company. The 5.875% Senior Notes Indenture contains certain affirmative and negative covenants, including limitations on restricted payments (such as share repurchases, dividends, and early payment of indebtedness), limitations on indebtedness, limitations on the sale of assets, and limitations on liens. Payments that would otherwise be characterized as restricted payments are permitted under the 5.875% Senior Notes Indenture in an amount not to exceed 50% of our consolidated net income for the period from the issue date to the date of the restricted payment, provided that at the time of making such payments, (a) no default has occurred or would result from the making of such payments, and (b) we are able to satisfy the debt incurrence test under the 5.875% Senior Notes Indenture, or the 5.875% Senior Notes Lifetime Aggregate Limit. In addition, the 5.875% Senior Notes Indenture provides for other exceptions to the restricted payments covenant, each of which are independent of the 5.875% Senior Notes Lifetime Aggregate Limit. Among such exceptions is the ability to make share repurchases each fiscal year in an amount not to exceed the lesser of (i) $30.0 million in any fiscal year or (ii) 75.0% of our consolidated net income for the previous four consecutive published fiscal quarters prior to the date of the determination of such consolidated net income. In addition, we purchased an additional $85.0 million of shares of our common stock in fiscal 2014 (including our $75.0 million tender offer), which purchases were permitted under various other exceptions.

5.000% Senior Notes – During fiscal 2015, we issued an aggregate of $75.0 million of 5.000% Senior Notes due 2018, or the 5.000% Senior Notes, to various institutional investors pursuant to the terms and conditions of an indenture, or the 5.000% Senior Notes Indenture and collectively with the 5.875% Senior Notes Indenture, the Senior Notes Indentures, and purchase agreements. The 5.000% Senior Notes bear interest at a rate of 5.000% per annum payable on January 15 and July 15 of each year, beginning on January 15, 2015. We incurred $2.3 million of debt issuance costs related to the issuance of the 5.000% Senior Notes.

At any time prior to July 15, 2016, we may, at our option (a) upon not less than 30 nor more than 60 days’ prior notice, redeem all or a portion of the 5.000% Senior Notes at the redemption price of 100% of the principal amount of the 5.000% Senior Notes, plus an applicable premium, plus accrued and unpaid interest as of the redemption date; or (b) redeem up to 35% of the aggregate principal amount of the 5.000% Senior Notes with the net cash proceeds of one or more equity offerings at a redemption price of 105.000% of

7


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2014 and 2013

 

the principal amount of the 5.000% Senior Notes, plus accrued and unpaid interest as of the redemption date; provided, that in the case of the foregoing clause, at least 65% of the aggregate original principal amount of the 5.000% Senior Notes remains outstanding, and the redemption occurs within 60 days after the closing of the equity offering. On and after July 15, 2016, we may, at our option, upon not less than 30 nor more than 60 days’ prior notice, redeem all or a portion of the 5.000% Senior Notes at the redemption price of (a) 102.500% of the principal amount of the 5.000% Senior Notes to be redeemed, if redeemed during the 12-month period beginning on July 15, 2016; or (b) 100% of the principal amount of the 5.000% Senior Notes to be redeemed, if redeemed during the 12-month period beginning on July 15, 2017, plus, in either case, accrued and unpaid interest on the 5.000% Senior Notes as of the applicable redemption date. Subject to certain restrictions and conditions, we may be required to make an offer to repurchase the 5.000% Senior Notes from the holders of the 5.000% Senior Notes in connection with a change of control or disposition of assets. If not redeemed by us or repaid pursuant to the holders’ right to require repurchase, the 5.000% Senior Notes mature on July 15, 2018.

The 5.000% Senior Notes are general, unsecured obligations of our company. The 5.000% Senior Notes Indenture contains certain affirmative and negative covenants, including limitations on restricted payments (such as share repurchases, dividends, and early payment of indebtedness), limitations on indebtedness, limitations on the sale of assets, and limitations on liens. Payments that would otherwise be characterized as restricted payments are permitted under the 5.000% Senior Notes Indenture in an amount not to exceed 50% of our consolidated net income for the period from the issue date to the date of the restricted payment, provided that at the time of making such payments, (a) no default has occurred or would result from the making of such payments, and (b) we are able to satisfy the debt incurrence test under the 5.000% Senior Notes Indenture, or the 5.000% Senior Notes Lifetime Aggregate Limit. In addition, the 5.000% Senior Notes Indenture provides for other exceptions to the restricted payments covenant, each of which are independent of the 5.000% Senior Notes Lifetime Aggregate Limit. Among such exceptions is (i) the ability to make share repurchases each fiscal year in an amount not to exceed the lesser of (A) $50.0 million in any fiscal year or (B) 75.0% of our consolidated net income for the previous four consecutive published fiscal quarters prior to the date of the determination of such consolidated net income, and (ii) share repurchases over the life of the 5.000% Senior Notes in an aggregate amount not to exceed $75.0 million.

The limitation on indebtedness in the Senior Notes Indentures is only applicable at such time that the consolidated coverage ratio (as set forth in the Senior Notes Indentures) for us and our restricted subsidiaries is less than 3.00 to 1.00. In general, as set forth in the Senior Notes Indentures, the consolidated coverage ratio is determined by comparing our prior four quarters’ consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) to our consolidated interest expense.

The credit agreement for our revolving credit facility contains financial covenants relating to maintaining maximum leverage and minimum debt service coverage. The Senior Notes Indentures contain a financial covenant relating to times interest earned.

Letters of Credit – At October 31, 2014, we had outstanding letters of credit under our credit facility aggregating $1.1 million.

 

(5) Inventories:

The following table sets forth a summary of inventories, stated at the lower of cost or market, as of October 31, 2014 and April 30, 2014 (in thousands):

 

 

October 31, 2014

 

 

April 30, 2014

 

Finished goods

$

39,211

 

 

$

26,523

 

Finished parts

 

46,172

 

 

 

47,109

 

Work in process

 

6,512

 

 

 

7,643

 

Raw material

 

7,348

 

 

 

5,467

 

Total inventories

$

99,243

 

 

$

86,742

 

 

 

(6) Stockholders’ Equity:

Treasury Stock

During fiscal 2014, our board of directors authorized the repurchase of up to $30.0 million of our common stock, subject to certain conditions, in the open market or privately negotiated transactions, commencing no earlier than May 1, 2014. During the six months ended October 31, 2014, we completed this stock repurchase program by repurchasing 2.1 million shares of our common stock for $30.0 million, utilizing cash on hand.

8


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2014 and 2013

 

Earnings per Share

The following table provides a reconciliation of the income/(loss) amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the three and six months ended October 31, 2014 and 2013 (in thousands, except per share data):

 

 

For the Three Months Ended October 31,

 

 

For the Six Months Ended October 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

5,091

 

 

$

17,145

 

 

$

19,708

 

 

$

43,671

 

Loss from discontinued operations

 

(41

)

 

 

(158

)

 

 

(102

)

 

 

(208

)

Net income

$

5,050

 

 

$

16,987

 

 

$

19,606

 

 

$

43,463

 

Weighted average shares outstanding - Basic

 

53,545

 

 

 

59,620

 

 

 

54,188

 

 

 

61,931

 

Dilutive effect of stock option and award plans

 

1,106

 

 

 

1,364

 

 

 

1,247

 

 

 

1,820

 

Diluted shares outstanding

 

54,651

 

 

 

60,984

 

 

 

55,435

 

 

 

63,751

 

Earnings per share - Basic (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.10

 

 

$

0.29

 

 

$

0.36

 

 

$

0.71

 

Loss from discontinued operations

$

(0.00

)

 

$

(0.00

)

 

$

(0.00

)

 

$

(0.00

)

Net income

$

0.09

 

 

$

0.28

 

 

$

0.36

 

 

$

0.70

 

Earnings per share - Diluted (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.09

 

 

$

0.28

 

 

$

0.36

 

 

$

0.69

 

Loss from discontinued operations

$

(0.00

)

 

$

(0.00

)

 

$

(0.00

)

 

$

(0.00

)

Net income

$

0.09

 

 

$

0.28

 

 

$

0.35

 

 

$

0.68

 

_______________

(a)

Net income per share may not equal earnings per share from continuing operations plus discontinued operations due to rounding.

For the three months ended October 31, 2014, there were 107,081 shares of common stock issuable upon the exercise of stock options and under our 2011 Employee Stock Purchase Plan, or ESPP, that were excluded from the computation of diluted earnings per share because the effect would be antidilutive. For the three months ended October 31, 2013, 88,839 shares of common stock issuable upon the exercise of stock options were excluded from the computation of diluted earnings per share because the effect would be antidilutive.

For the six months ended October 31, 2014, there were 54,037 shares of common stock issuable upon the exercise of stock options and under our ESPP that were excluded from the computation of diluted earnings per share because the effect would be antidilutive. For the six months ended October 31, 2013, 124,930 shares of common stock issuable upon the exercise of stock options were excluded from the computation of diluted earnings per share because the effect would be antidilutive.

Incentive Stock and Employee Stock Purchase Plans

We have two Stock Plans: the 2004 Incentive Stock Plan and the 2013 Incentive Stock Plan. New grants under the 2004 Incentive Stock Plan have not been made since the approval of the 2013 Incentive Stock Plan at our September 23, 2013 annual meeting of stockholders. All new grants covering all participants are issued under the 2013 Incentive Stock Plan. Except in specific circumstances, grants vest over a period of three years and are exercisable for a period of 10 years. The plan also permits the grant of awards to non-employees, which our board of directors has authorized in the past.

9


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2014 and 2013

 

The number of shares and weighted average exercise prices of options for the six months ended October 31, 2014 and 2013 are as follows:

 

 

For the Six Months Ended October 31,

 

 

2014

 

 

2013

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Average

 

 

 

 

 

 

Average

 

 

Shares

 

 

Exercise Price

 

 

Shares

 

 

Exercise Price

 

Options outstanding, beginning of year

 

2,258,349

 

 

$

6.15

 

 

 

3,019,127

 

 

$

5.31

 

Exercised during the period

 

(166,886

)

 

 

4.77

 

 

 

(418,466

)

 

 

2.55

 

Canceled/forfeited during period

 

(13,000

)

 

 

7.98

 

 

 

(28,000

)

 

 

5.59

 

Options outstanding, end of period

 

2,078,463

 

 

$

6.25

 

 

 

2,572,661

 

 

$

5.76

 

Weighted average remaining contractual life

5.49 years

 

 

 

 

 

 

6.22 years

 

 

 

 

 

Options exercisable, end of period

 

1,986,465

 

 

$

6.18

 

 

 

2,013,974

 

 

$

5.79

 

Weighted average remaining contractual life

5.40 years

 

 

 

 

 

 

5.73 years

 

 

 

 

 

 

The aggregate intrinsic value of outstanding options as of October 31, 2014 and 2013 was $9.3 million and $14.0 million, respectively. The aggregate intrinsic value of outstanding options that were exercisable as of October 31, 2014 and 2013 was $9.1 million and $11.1 million, respectively. The aggregate intrinsic value of the options exercised for the six months ended October 31, 2014 and 2013 was $1.3 million and $3.9 million, respectively. At October 31, 2014, the total of unrecognized compensation cost of outstanding options was $81,000, which is expected to be recognized over the remaining weighted average vesting period of 0.43 years.

On September 26, 2011, our stockholders approved our ESPP. All options and rights to participate in our ESPP are nontransferable and subject to forfeiture in accordance with our ESPP guidelines. In the event of certain corporate transactions, each option outstanding under our ESPP will be assumed or an equivalent option will be substituted by the successor corporation or a parent or subsidiary of such successor corporation. During the six months ended October 31, 2014 and 2013, 79,291 and 84,081 shares were purchased under our ESPP, respectively.

The following assumptions were used in valuing our ESPP purchases during the six-month periods ended October 31, 2014 and 2013:

 

 

For the Six Months Ended October 31,

 

2014

 

2013

Risk-free interest rate

0.04%

 

0.04%

Expected term

6 months

 

6 months

Expected volatility

36.0%

 

35.2%

Dividend yield

0%