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EX-31.2 - EX-31.2 - AMERICAN OUTDOOR BRANDS CORPswhc-ex312_7.htm
EX-31.1 - EX-31.1 - AMERICAN OUTDOOR BRANDS CORPswhc-ex311_6.htm
EX-32.1 - EX-32.1 - AMERICAN OUTDOOR BRANDS CORPswhc-ex321_8.htm
EX-32.2 - EX-32.2 - AMERICAN OUTDOOR BRANDS CORPswhc-ex322_9.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended October 31, 2016

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      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      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

 

 

 

 

 

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  

The registrant had 56,331,314 shares of common stock, par value $0.001, outstanding as of November 28, 2016.

 

 

 

 

 

 


 

SMITH & WESSON HOLDING CORPORATION

Quarterly Report on Form 10-Q

For the Three and Six Months Ended October 31, 2016 and 2015

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

4

 

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

  

22

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

32

 

Item 4. Controls and Procedures

  

32

 

 

 

 

PART II - OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

32

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

Item 6. Exhibits

  

33

Signatures

  

34

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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding our plan to continue to capitalize on our goodwill by expanding consumer awareness of the products we produce; the impact, if any, of recently issued accounting standards on our consolidated financial statements; the features of our outstanding debt and our expectation that our interest rate swap will not have any material effect on our earnings within the next 12 months; estimated amortization expense of intangible assets for future periods; the potential for impairment charges; potential repurchases of our common stock; the outcome of the lawsuits to which we are subject and their effect on us; the amount of environmental and other reserves; future investments for capital expenditures; future products and product developments; the features and performance of our products; the success of particular product or marketing programs; market share gains; and liquidity and anticipated cash needs and availability. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors could cause actual results to differ materially from those indicated by the forward-looking statements, including the demand for our products; the costs and ultimate conclusion of certain legal matters; the state of the U.S. economy in general and the firearm industry in particular; 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; our ability to integrate acquired businesses in a successful manner; the general growth of our outdoor products and accessories business; the potential for cancellation of orders from our backlog;  and other factors detailed from time to time in our reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended April 30, 2016, filed with the SEC on June 16, 2016.

 

 

 

 


 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

As of:

 

 

October 31, 2016

 

 

April 30, 2016

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

73,896

 

 

$

191,279

 

Accounts receivable, net of allowance for doubtful accounts of $805 on

  October 31, 2016 and $680 on April 30, 2016

 

69,959

 

 

 

57,792

 

Inventories

 

116,497

 

 

 

77,789

 

Prepaid expenses and other current assets

 

7,360

 

 

 

4,307

 

Income tax receivable

 

6,000

 

 

 

2,064

 

Total current assets

 

273,712

 

 

 

333,231

 

Property, plant, and equipment, net

 

151,499

 

 

 

135,405

 

Intangibles, net

 

139,152

 

 

 

62,924

 

Goodwill

 

157,250

 

 

 

76,357

 

Other assets

 

6,643

 

 

 

11,586

 

 

$

728,256

 

 

$

619,503

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

52,767

 

 

$

45,513

 

Accrued expenses

 

33,627

 

 

 

28,447

 

Accrued payroll and incentives

 

14,745

 

 

 

18,784

 

Accrued income taxes

 

223

 

 

 

5,960

 

Accrued profit sharing

 

6,760

 

 

 

11,459

 

Accrued warranty

 

6,343

 

 

 

6,129

 

Current portion of notes payable

 

6,300

 

 

 

6,300

 

Total current liabilities

 

120,765

 

 

 

122,592

 

Deferred income taxes

 

32,953

 

 

 

12,161

 

Notes payable, net of current portion

 

188,323

 

 

 

166,564

 

Other non-current liabilities

 

9,718

 

 

 

10,370

 

Total liabilities

 

351,759

 

 

 

311,687

 

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, 71,839,096 shares

   issued and 56,276,463 shares outstanding on October 31, 2016 and

   71,558,633 shares issued and 55,996,011 shares outstanding on April 30, 2016

 

72

 

 

 

72

 

Additional paid-in capital

 

240,208

 

 

 

239,505

 

Retained earnings

 

309,016

 

 

 

241,310

 

Accumulated other comprehensive loss

 

(476

)

 

 

(748

)

Treasury stock, at cost (15,562,622 shares on October 31, 2016 and

   April 30, 2016)

 

(172,323

)

 

 

(172,323

)

Total stockholders’ equity

 

376,497

 

 

 

307,816

 

 

$

728,256

 

 

$

619,503

 

 

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

4


 

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended October 31,

 

 

For the Six Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(In thousands, except per share data)

 

Net sales

 

$

233,528

 

 

$

143,242

 

 

$

440,479

 

 

$

291,005

 

Cost of sales

 

 

135,923

 

 

 

87,027

 

 

 

255,305

 

 

 

175,920

 

Gross profit

 

 

97,605

 

 

 

56,215

 

 

 

185,174

 

 

 

115,085

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,698

 

 

 

2,695

 

 

 

4,851

 

 

 

5,091

 

Selling and marketing

 

 

12,527

 

 

 

12,536

 

 

 

21,721

 

 

 

21,754

 

General and administrative

 

 

30,229

 

 

 

19,202

 

 

 

53,926

 

 

 

36,640

 

Total operating expenses

 

 

45,454

 

 

 

34,433

 

 

 

80,498

 

 

 

63,485

 

Operating income

 

 

52,151

 

 

 

21,782

 

 

 

104,676

 

 

 

51,600

 

Other (expense)/income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense)/income

 

 

(30

)

 

 

(5

)

 

 

(30

)

 

 

(12

)

Interest (expense)/income

 

 

(2,175

)

 

 

(2,296

)

 

 

(4,188

)

 

 

(9,496

)

Total other (expense)/income

 

 

(2,205

)

 

 

(2,301

)

 

 

(4,218

)

 

 

(9,508

)

Income from operations before income taxes

 

 

49,946

 

 

 

19,481

 

 

 

100,458

 

 

 

42,092

 

Income tax expense

 

 

17,463

 

 

 

7,015

 

 

 

32,752

 

 

 

15,214

 

Net income

 

 

32,483

 

 

 

12,466

 

 

 

67,706

 

 

 

26,878

 

Comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized income/(loss) on interest rate swap

 

 

814

 

 

 

(302

)

 

 

406

 

 

 

(483

)

Other comprehensive income/(loss), before income taxes

 

 

814

 

 

 

(302

)

 

 

406

 

 

 

(483

)

Income tax (expense)/benefit on other comprehensive income/(loss)

 

 

(285

)

 

 

112

 

 

 

(134

)

 

 

177

 

Other comprehensive income/(loss), net of tax

 

 

529

 

 

 

(190

)

 

 

272

 

 

 

(306

)

Comprehensive income

 

$

33,012

 

 

$

12,276

 

 

$

67,978

 

 

$

26,572

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.23

 

 

$

1.21

 

 

$

0.49

 

Diluted

 

$

0.57

 

 

$

0.22

 

 

$

1.18

 

 

$

0.48

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

56,231

 

 

 

54,447

 

 

 

56,140

 

 

 

54,333

 

Diluted

 

 

57,136

 

 

 

55,668

 

 

 

57,145

 

 

 

55,621

 

 

 

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

 

5


 

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED 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/(Loss)

 

 

Shares

 

 

Amount

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2016

 

 

71,559

 

 

$

72

 

 

$

239,505

 

 

$

241,310

 

 

$

(748

)

 

 

15,563

 

 

$

(172,323

)

 

$

307,816

 

Stock-based compensation

 

 

 

 

 

 

 

 

3,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,918

 

Shares issued under employee stock purchase plan

 

 

67

 

 

 

 

 

 

948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

948

 

Change in unrealized income on interest rate

   swap, net of tax effect

 

 

 

 

 

 

 

 

 

 

272

 

 

 

 

 

 

 

272

 

Issuance of common stock under restricted

   stock unit awards, net of shares surrendered

 

 

213

 

 

 

 

 

 

(4,163

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,163

)

Net income

 

 

 

 

 

 

 

 

 

 

67,706

 

 

 

 

 

 

 

 

 

 

 

 

67,706

 

Balance at October 31, 2016

 

 

71,839

 

 

$

72

 

 

$

240,208

 

 

$

309,016

 

 

$

(476

)

 

 

15,563

 

 

$

(172,323

)

 

$

376,497

 

 

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

 

 

 

6


 

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Six Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

67,706

 

 

$

26,878

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

23,772

 

 

 

21,066

 

Loss on sale/disposition of assets

 

 

104

 

 

 

19

 

Provision for/(recoveries of) losses on notes and accounts receivable

 

 

308

 

 

 

(72

)

Stock-based compensation expense

 

 

3,918

 

 

 

3,247

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,538

)

 

 

5,199

 

Inventories

 

 

(14,349

)

 

 

(24,002

)

Prepaid expenses and other current assets

 

 

(2,775

)

 

 

(587

)

Income taxes

 

 

(9,676

)

 

 

(10,700

)

Accounts payable

 

 

1,111

 

 

 

(1,022

)

Accrued payroll and incentives

 

 

(4,728

)

 

 

5,872

 

Accrued profit sharing

 

 

(4,699

)

 

 

(2,513

)

Accrued expenses

 

 

4,235

 

 

 

989

 

Accrued warranty

 

 

116

 

 

 

(184

)

Other assets

 

 

(183

)

 

 

(156

)

Other non-current liabilities

 

 

52

 

 

 

(1,273

)

Net cash provided by operating activities

 

 

61,374

 

 

 

22,761

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(178,059

)

 

 

 

Refunds on machinery and equipment

 

 

5,083

 

 

 

4,222

 

Receipts from note receivable

 

 

43

 

 

 

41

 

Payments to acquire patents and software

 

 

(425

)

 

 

(136

)

Proceeds from sale of property and equipment

 

 

 

 

 

61

 

Payments to acquire property and equipment

 

 

(23,312

)

 

 

(18,352

)

Net cash used in investing activities

 

 

(196,670

)

 

 

(14,164

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from loans and notes payable

 

 

50,000

 

 

 

105,000

 

Cash paid for debt issuance costs

 

 

(525

)

 

 

(1,024

)

Payments on capital lease obligation

 

 

(298

)

 

 

(298

)

Payments on notes payable

 

 

(28,150

)

 

 

(101,575

)

Proceeds from Economic Development Incentive Program

 

 

101

 

 

 

 

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

 

 

948

 

 

 

1,758

 

Payment of employee withholding tax related to restricted stock units

 

 

(4,163

)

 

 

(1,690

)

Excess tax benefit of stock-based compensation

 

 

 

 

 

1,074

 

Net cash provided by financing activities

 

 

17,913

 

 

 

3,245

 

Net increase/(decrease) in cash and cash equivalents

 

 

(117,383

)

 

 

11,842

 

Cash and cash equivalents, beginning of period

 

 

191,279

 

 

 

42,222

 

Cash and cash equivalents, end of period

 

$

73,896

 

 

$

54,064

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

3,802

 

 

$

9,271

 

Income taxes

 

 

42,609

 

 

 

24,936

 

 

 

 

 

 

 

 

 

 

7


 

 

 

 

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Non-cash Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

$

 

3,082

 

$

 

 

 

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

 

 

 

8


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2016 and 2015

 

(1) Organization:

We are one of the world’s leading providers of firearms and quality products for the shooting, hunting, and rugged outdoor enthusiast. We manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, 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, and law enforcement and security agencies and officers in the United States and throughout the world. We are also a leading provider of outdoor products & accessories, including, reloading, gunsmithing, gun cleaning supplies, tree saws, laser sights, tactical lights, tools and knives, flashlights, soft goods, and vault accessories.

We manufacture firearm components at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut and develop, assemble, and market our firearm products in our Springfield, Massachusetts facility. We develop, source, market, and distribute our outdoor and accessories products at our facilities in Columbia, Missouri and Kingsport, Tennessee. We develop, market, and assemble our electro-optics products in our Wilsonville, Oregon facility. We sell our products under a variety of brands, including the Smith & Wesson®, M&P®, Thompson/Center ArmsTM, Crimson Trace®, Caldwell® Shooting Supplies, Wheeler® Engineering, Tipton® Gun Cleaning Supplies, Frankford Arsenal® Reloading Tools, Lockdown® Vault Accessories, HooymanTM Premium Tree Saws, BOG-POD®, Golden Rod® Moisture Control, Schrade®, Old Timer®, Uncle Henry®, and ImperialTM. We plan to continue to capitalize on the goodwill developed through our historic 164 year old “Smith & Wesson” brand as well as our other well-known brands by expanding consumer awareness of the products we produce.

On August 1, 2016, we acquired substantially all of the net assets of Taylor Brands, LLC, and on August 26, 2016 we acquired all of the issued and outstanding stock of Crimson Trace Corporation. See note 3 – Acquisitions for more information regarding these transactions.

 

(2) Basis of Presentation:

Interim Financial Information – The condensed consolidated balance sheet as of October 31, 2016, the condensed consolidated statements of income and comprehensive income for the three and six months ended October 31, 2016 and 2015, the condensed consolidated statement of changes in stockholders’ equity for the six months ended October 31, 2016, and the condensed consolidated statements of cash flows for the six months ended October 31, 2016 and 2015 have been prepared by us without audit. 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, 2016 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, 2016 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, or GAAP, have been condensed or omitted. These condensed 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, 2016. The results of operations for the six months ended October 31, 2016 may not be indicative of the results that may be expected for the year ending April 30, 2017, or any other period.

 

Recently Issued Accounting Standards – In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU 2014-09, Revenue from Contracts with Customers (Topic 606). 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. In August 2015, the FASB issued ASU 2015-14 that deferred the effective date for ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Additionally, in March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain narrow areas and adds some practical expedients. The effective dates for these ASU’s is the same as the effective date for ASU No. 2014-09. We are currently evaluating the impact that these ASUs will have on our condensed consolidated financial statements.

9


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2016 and 2015

 

In July 2015, the FASB issued ASU 2015-11, Inventory - Simplifying the Measurement of Inventory (Topic 330), which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined other than by the last-in first-out (LIFO) method and the retail inventory method. ASU 2015-11 is effective for periods beginning after December 15, 2016, and early adoption is permitted. The new guidance must be applied prospectively. We are currently evaluating the impact that ASU 2015-11 will have on our condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends the existing guidance to require lessees to recognize lease assets and lease liabilities arising from operating leases in a classified balance sheet. The requirements of this ASU are effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact that ASU 2016-02 will have on our condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which includes multiple amendments intended to simplify aspects of share-based payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The amendments of this ASU are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning December 15, 2018, and early adoption is permitted. We have elected to early adopt this standard during the six months ended October 31, 2016 and prospectively present the change to the financial statements given the immaterial nature of this adoption to our condensed consolidated financial statements.

 

 

(3) Acquisitions

 

During the three months ended October 31, 2016, we acquired substantially all of the net assets of Taylor Brands, LLC as well as all of the issued and outstanding stock of Crimson Trace Corporation for an aggregate of $178.1 million, net of cash acquired, subject to certain adjustments, utilizing cash on hand. Taylor Brands, LLC, based in Kingsport, Tennessee, is a designer and distributor of high-quality knives, specialty tools, and accessories and a licensee of our wholly owned subsidiary, Smith & Wesson Corp. Crimson Trace Corporation, based in Wilsonville, Oregon, is a leading provider of laser sight and tactical light products for consumers, law enforcement, security agencies, and military agencies around the globe.

 

We are finalizing the valuations of the assets acquired and liabilities assumed related to both acquisitions. Therefore, the fair values set forth herein are subject to further adjustments as we obtain additional information during the respective measurement periods, which will not exceed 12 months from the date of each acquisition. The acquisitions will necessitate the use of this measurement period to adequately analyze and assess a number of factors used in establishing the asset and liability fair values as of each acquisition date, including the significant contractual and operational factors underlying the trade name, developed technology, and customer relationship intangible assets and the related tax impacts of any changes made.

 

10


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2016 and 2015

 

The following table summarizes the estimated preliminary allocation of the purchase price for these acquisitions.

 

 

 

 

 

During the Three Months Ended October 31, 2016

 

 

 

 

 

 

Accounts receivable

$

 

8,937

 

Inventories

 

 

24,359

 

Other current assets

 

 

379

 

Property, plant, and equipment

 

 

6,851

 

Intangibles

 

 

84,100

 

Goodwill

 

 

80,893

 

Total assets acquired

 

 

205,519

 

Accounts payable

 

 

5,066

 

Accrued expenses

 

 

946

 

Accrued payroll

 

 

689

 

Accrued income taxes

 

 

3

 

Accrued warranty

 

98

 

Deferred income taxes

 

 

20,658

 

Total liabilities assumed

 

 

27,460

 

 

$

 

178,059

 

 

 

Included in general and administrative costs are $3.2 million of acquisition-related costs incurred during the six months ended October 31, 2016. These acquisitions generated $18.6 million of revenue during the three and six months ended October 31, 2016.

 

We amortize intangible assets in proportion to expected yearly revenue generated from the intangibles that we acquire. We amortize order backlog over the estimated life during which the backlog is fulfilled. The following are the identifiable intangible assets acquired (in thousands) and their respective weighted average lives:

 

 

 

 

 

 

Weighted Average

 

 

Amount

 

 

 

Life (In years)

 

Developed technology

$

 

3,000

 

 

 

 

4.1

 

Customer relationships

 

 

64,000

 

 

 

 

5.2

 

Trade names

 

 

15,900

 

 

 

 

4.9

 

Order backlog

 

 

1,100

 

 

 

 

0.3

 

Non-competition agreement

 

 

100

 

 

 

 

3.4

 

 

$

 

84,100

 

 

 

 

 

 

 

Additionally, the following table reflects the unaudited pro forma results of operations assuming that the Taylor Brands, LLC and Crimson Trace Corporation acquisitions had occurred on May 1, 2015 (in thousands, except per share data):

 

 

For the Three

 

 

For the Three

 

 

For the Six

 

 

For the Six

 

 

Months Ended

 

 

Months Ended

 

 

Months Ended

 

 

Months Ended

 

 

October 31, 2015

 

 

October 31, 2016

 

 

October 31, 2015

 

 

October, 2016

 

Net sales

$

 

167,011

 

 

$

 

235,382

 

 

$

 

327,803

 

 

$

 

457,972

 

Income from operations

 

 

20,322

 

 

 

 

53,379

 

 

 

 

42,243

 

 

 

 

103,669

 

Net income per share - diluted

 

 

0.27

 

 

 

 

0.61

 

 

 

 

0.52

 

 

 

 

1.23

 

 

 

The unaudited pro forma income from operations for the three and six months ended October 31, 2016 and 2015 has been adjusted to reflect increased cost of goods sold from the fair value step-up in inventory, which is expensed over the first inventory cycle, and the amortization of intangibles and order backlog incurred as if the acquisitions had occurred on May 1, 2015. The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the actual results that would have been achieved had the Taylor Brands, LLC and Crimson Trace Corporation acquisitions occurred as of May 1, 2015 or the results that may be achieved in future periods.

 

11


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2016 and 2015

 

(4) Goodwill

 

The changes in the carrying amount of goodwill for the six months period ended October 31, 2016 by reporting segment are as follows:

 

 

 

 

Firearms

 

 

 

Outdoor Products &

 

 

 

Total

 

 

 

 

 

Segment

 

 

 

Accessories Segment

 

 

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of April 30, 2016

 

$

 

13,770

 

 

$

 

62,587

 

 

$

 

76,357

 

 

Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of July 31, 2016

 

 

 

13,770

 

 

 

 

62,587

 

 

 

 

76,357

 

 

Acquisitions

 

 

 

 

 

 

 

80,893

 

 

 

 

80,893

 

 

Balance as of October 31, 2016

 

$

 

13,770

 

 

$

 

143,480

 

 

$

 

157,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to Note 11 — Segment Information below for more detail.  

 

 

(5) Notes Payable:

Credit Facilities – On October 27, 2016, we and certain of our domestic subsidiaries entered into a second amendment to our existing unsecured credit agreement, or the Second Amendment, with TD Bank, N.A. and other lenders, or the Lenders. Among other things, the Second Amendment increases the revolving line of credit, or the Revolving Line, available from our lenders to $350.0 million, increases the option to expand the credit commitment to an additional $150.0 million, and extends the maturity of the Revolving Line from June 15, 2020 to October 27, 2021. Other than the changes described in the Second Amendment, we otherwise remain subject to the terms of the Credit Agreement, as described below. We incurred $525,000 of debt issuance costs related to this amendment and have recorded these costs in notes payable in the condensed consolidated balance sheet.

On June 15, 2015, we entered into an unsecured credit facility, or the Credit Agreement, with the Lenders, which included a $175.0 million Revolving Line and a $105.0 million term loan, or the Term Loan, of which $97.1 million remains outstanding as of October 31, 2016. As described above, the Revolving Line provides for availability until October 27, 2021 for general corporate purposes, with borrowings to bear interest at a variable rate equal to LIBOR or prime plus an applicable margin based on our consolidated leverage ratio, at our election. As of October 31, 2016, we had $25.0 million of borrowings outstanding on the Revolving Line, which bore interest at 4.00%, at the prime rate plus an applicable margin. The Term Loan, which bears interest at a variable rate, requires principal payments of $6.3 million per annum plus interest, payable quarterly. Any remaining outstanding amount on the maturity date of June 15, 2020 for the Term Loan will be due in full. We incurred $1.0 million of debt issuance costs related to our new credit facility, which are included in notes payable in the accompanying condensed consolidated balance sheet.  

We were required to obtain fixed interest rate protection on the Term Loan covering not less than 75% of the aggregate outstanding principal balance of the Term Loan. Accordingly, on June 18, 2015, we entered into an interest rate swap agreement, which expires on June 15, 2020, that covered 100% of the $105.0 million of floating rate debt. On July 6, 2015, we executed an interest rate swap pursuant to such agreement, which requires us to pay interest at a defined rate of 1.56% while receiving interest at a defined variable rate of one-month LIBOR (0.188%). This swap, when combined with the applicable margin based on our consolidated leverage ratio, effectively fixed our interest rate on the Term Loan, which is subject to change based on changes in our consolidated leverage ratio. As of October 31, 2016, our interest rate on the Term Loan is 3.06%.

As of October 31, 2016, the interest rate swap was considered effective and had no effect on earnings. The fair value of the interest rate swap on October 31, 2016 was a liability of $883,000 and was included in other long-term liabilities on our condensed consolidated balance sheet. We do not expect the interest rate swap to have any material effect on earnings within the next 12 months.

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 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.

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 a 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%

12


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2016 and 2015

 

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 are (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 5.000% Senior Notes Indenture is only applicable at such time that the consolidated coverage ratio (as set forth in the 5.000% Senior Notes Indenture) for us and our restricted subsidiaries is less than 3.00 to 1.00. In general, as set forth in the 5.000% Senior Notes Indenture, 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 credit facility contains financial covenants relating to maintaining maximum leverage and minimum debt service coverage. The 5.000% Senior Notes Indenture contains a financial covenant relating to times interest earned.

Letters of Credit – At October 31, 2016, we had outstanding letters of credit under our credit facility aggregating $1.0 million.

(6) Fair Value Measurement:

We follow the provisions of ASC 820-10, Fair Value Measurements and Disclosures Topic, for our financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

Financial assets and liabilities recorded on the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities).

Our cash equivalents, which are measured at fair value on a recurring basis, totaled $73.9 million and $191.3 million as of October 31, 2016 and April 30, 2016, respectively. We utilized Level 1 of the value hierarchy to determine the fair values of these assets.

Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

quoted prices for identical or similar assets or liabilities in non-active markets (such as corporate and municipal bonds that trade infrequently);

inputs other than quoted prices that are observable for substantially the full term of the asset or liability (such as interest rate and currency swaps); and

13


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended October 31, 2016 and 2015

 

inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (such as certain securities and derivatives).

The carrying value of our Term Loan approximates the fair value as of October 31, 2016, in considering Level 2 inputs within the hierarchy. The fair value of our 5.000% Senior Notes as of October 31, 2016 is approximate to the carrying value in considering Level 2 inputs within the hierarchy as the Senior Notes are not frequently traded. The fair value of the interest rate swap was estimated by a third party using inputs that are observable or that can be corroborated by observable market data, such as interest rate yield curves, and, therefore, is classified within Level 2 of the valuation hierarchy. For more information regarding the interest rate swap, refer to Note 5.

Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our assumptions about the assumptions a market participant would use in pricing the asset or liability.

We currently do not have any Level 3 financial assets or liabilities.

 

(7) Inventories:

The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or market, as of October 31, 2016 and April 30, 2016 (in thousands):

 

 

October 31, 2016

 

 

April 30, 2016

 

Finished goods

$

51,742

 

 

$

26,574

 

Finished parts

 

40,762

 

 

 

32,804

 

Work in process

 

10,512

 

 

 

9,263

 

Raw material

 

13,481

 

 

 

9,148

 

Total inventories

$

116,497

 

 

$

77,789

 

 

(8) Intangible Assets:

 

The following table presents a summary of intangible assets as of October 31, 2016 and April 30, 2016 (in thousands):

 

 

 

October 31, 2016

 

 

April 30, 2016

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer relationships

 

$

 

92,660

 

 

$

 

(9,926

)

 

$

 

82,734

 

 

$

 

28,560

 

 

$

 

(6,423

)

 

$

 

22,137

 

Developed technology

 

 

 

19,430

 

 

 

 

(4,030

)

 

 

 

15,400

 

 

 

 

16,430

 

 

 

 

(2,890

)

 

 

 

13,540

 

Patents, trademarks, and trade names

 

 

 

52,115

 

 

 

 

(12,048

)

 

 

 

40,067

 

 

 

 

36,076

 

 

 

 

(9,262

)

 

 

 

26,814

 

Backlog

 

 

 

1,100

 

 

 

 

(850

)

 

 

 

250