Smith & Wesson Holding's CEO Discusses F1Q 2013 Results - Earnings Call Transcript

Smith & Wesson Holding Corporation. (SWHC)

Fiscal Q1 2013 Earnings Call

September 6, 2012 5:00 p.m. EDT

Executives

Liz Sharp – VP, IR

James Debney – President and CEO

Jeff Buchanan – CFO

Analysts

Reed Anderson – Northland Securities

Cai von Rumohr – Cowen & Co.

Mike Greene – Benchmark Company

Scott Hamann – KeyBanc Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Smith & Wesson Holding Corporation Earnings Conference Call. My name is [Colby] and I will be your operator for today.

[Operator Instructions]. And as a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Liz Sharp, Vice President of Investor Relations. Please proceed, ma'am.

Liz Sharp

Thank you and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding sales margins, expenses and earnings for future periods, our product development and strategies and liquidity, and anticipated cash needs and availability. Our forward-looking statements represent our current judgment about the future and they are subject to various risks and uncertainties.

Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings, including our Forms S3, 8-K, 10-K and 10-Q. You can find those documents as well as the replay of this call on our website at smith-wesson.com.

Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements contained herein. Our actual results could differ materially from our statements today.

Now I will turn the call over to our President and CEO, James Debney.

James Debney

Good afternoon. Thank you for joining us and for your interest in our company. With me on the call today is Jeff Buchanan, our Chief Financial Officer, who later on will provide a recap of our financial performance and an updated outlook.

Today we are very pleased to report that we delivered yet another strong quarter, one that clearly demonstrates the results of our focus on and our commitment to our core firearms business. With a strong consumer market for firearms and a solid portfolio of both established and newer product all aligned to consumer preferences, our team made great progress on executing several key strategic and operational initiatives. In the process, we delivered results that again set a number of new records for company performance. With that, let me provide some of the highlights from our first quarter.

We again delivered record sales, another quarter in which our operations team did an excellent job accelerating our planned increases in manufacturing capacity, and working closely with our suppliers to enable them to ramp up to higher volumes. All of our combined operational activities contributed to record profitability, as reflected in net income and record earnings per share from continuing operations.

Our newest addition to the M&P family, the M&P Shield, remained in very high demand by both consumers and professionals, and backlog for this product continue to grow. Our overall backlog remained strong at $392 million. We used our cash position in the quarter to purchase some of our bonds in the open market. And lastly, we concluded the sale of our discontinued operations.

Overall, in the first quarter we demonstrated that we have the key components in place to deliver on opportunities for future profitable growth. These components include a strong portfolio of products that consumers desire, an operations team and suppliers that can deliver excellent performance, and an organization that has an ongoing commitment to lowering our costs and increasing our efficiency. Based on our continued focus on firearms, our successful results for the first quarter and our current outlook for the business, we are increasing our full-year fiscal 2013 guidance.

With that, I'll ask Jeff to review the financial results.

Jeff Buchanan

Thanks, James. Please note that this is only a discussion of our continuing operations. Therefore, when I refer to net income, this is only net income from our continuing operations. And when I reference EPS, I'm referring to earnings per diluted share from continuing operations. For the results of our discontinued operations, the sale of which was completed this quarter, please refer to our 10-Q which field this afternoon.

Revenue for the quarter was a record $136 million. This is an increase of $44.3 million or 48.3% over the prior year. We exceeded our revenue expectations by bringing forward capacity increases and working with our suppliers.

Our gross margins were 37.7%, nearly nine full percentage points higher than the first quarter of fiscal 2012. Gross margin was helped by a favorable production mix that included increased volumes of our strategically important M&P line, resulting in our corresponding improvement in manufacturing absorption. We also saw some one-time benefits in manufacturing and purchasing variances, including euro exchange rate benefits. Even without those one-time benefits, however, we have solid margin gains as a result of our focus on cost-saving efforts and manufacturing efficiencies. Therefore, we now expect that our gross margins will be above 34% for the rest of the year.

Our operating expenses in the quarter totaled $20 million or 14.7% of revenue versus $21 million or 22.9% of revenue last year. Thus, even though we had greater profit sharing and incentive expenses, actual SG&A costs were lower because of company-wide cost-saving efforts, as well as the timing and phasing of the selling and marketing expenses. As we focus on increasing market share, however, we do expect to see future increases on our selling and marketing expense.

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