10-Q 1 swhc-10q_20160131.htm 10-Q swhc-10q_20160131.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 January 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  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 55,109,084 shares of common stock, par value $0.001, outstanding as of March 1, 2016.

 

 

 

 

 

 


 

SMITH & WESSON HOLDING CORPORATION

Quarterly Report on Form 10-Q

For the Three and Nine Months Ended January 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

  

21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

30

 

Item 4. Controls and Procedures

  

30

 

 

 

 

PART II - OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

31

 

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

 

31

 

Item 6. Exhibits

  

31

Signatures

  

32

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 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; our ability to integrate acquired businesses in a successful manner; our accessories division’s ability to continue to launch high-quality, innovative products; the valuation of assets acquired and liabilities assumed in acquisitions; estimates of fair value, the potential for recasting amounts allocated to goodwill, and the deductibility of goodwill; 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; 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, 2015, filed with the Securities and Exchange Commission, or the SEC, on June 22, 2015.

 

 

 

 


 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

As of:

 

 

January 31, 2016

 

 

April 30, 2015

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

105,220

 

 

$

42,222

 

Accounts receivable, net of allowance for doubtful accounts of $709 on

   January 31, 2016 and $722 on April 30, 2015

 

89,814

 

 

 

55,280

 

Inventories

 

75,542

 

 

 

76,895

 

Prepaid expenses and other current assets

 

5,981

 

 

 

6,306

 

Deferred income taxes

 

16,441

 

 

 

16,373

 

Total current assets

 

292,998

 

 

 

197,076

 

Property, plant, and equipment, net

 

136,202

 

 

 

133,844

 

Intangibles, net

 

65,014

 

 

 

73,768

 

Goodwill

 

76,164

 

 

 

75,426

 

Other assets

 

6,652

 

 

 

10,811

 

 

$

577,030

 

 

$

490,925

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

35,288

 

 

$

32,360

 

Accrued expenses

 

20,723

 

 

 

19,021

 

Accrued payroll

 

15,430

 

 

 

7,556

 

Accrued income taxes

 

1,413

 

 

 

4,224

 

Accrued taxes other than income

 

7,704

 

 

 

5,281

 

Accrued profit sharing

 

7,875

 

 

 

6,165

 

Accrued warranty

 

6,156

 

 

 

6,404

 

Current portion of notes payable

 

6,300

 

 

 

Total current liabilities

 

100,889

 

 

 

81,011

 

Deferred income taxes

 

33,311

 

 

 

33,905

 

Notes payable, net of current portion

 

167,923

 

 

 

170,933

 

Other non-current liabilities

 

10,396

 

 

 

10,706

 

Total liabilities

 

312,519

 

 

 

296,555

 

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, 70,671,290 shares

   issued and 55,108,668 shares outstanding on January 31, 2016 and

   69,625,081 shares issued and 54,062,459 shares outstanding on April 30, 2015

 

71

 

 

 

70

 

Additional paid-in capital

 

231,800

 

 

 

219,198

 

Retained earnings

 

205,663

 

 

 

147,352

 

Accumulated other comprehensive (loss)/income

 

(700

)

 

 

73

 

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

   April 30, 2015)

 

(172,323

)

 

 

(172,323

)

Total stockholders’ equity

 

264,511

 

 

 

194,370

 

 

$

577,030

 

 

$

490,925

 

 

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

4


 

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended January 31,

 

 

For the Nine Months Ended January 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(In thousands, except per share data)

 

Net sales

 

$

210,786

 

 

$

130,550

 

 

$

501,791

 

 

$

370,865

 

Cost of sales

 

 

124,128

 

 

 

86,726

 

 

 

300,048

 

 

 

243,083

 

Gross profit

 

 

86,658

 

 

 

43,824

 

 

 

201,743

 

 

 

127,782

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,521

 

 

 

1,901

 

 

 

7,612

 

 

 

4,830

 

Selling and marketing

 

 

11,505

 

 

 

10,088

 

 

 

33,260

 

 

 

26,884

 

General and administrative

 

 

22,484

 

 

 

16,224

 

 

 

59,124

 

 

 

44,010

 

Total operating expenses

 

 

36,510

 

 

 

28,213

 

 

 

99,996

 

 

 

75,724

 

Operating income

 

 

50,148

 

 

 

15,611

 

 

 

101,747

 

 

 

52,058

 

Other (expense)/income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense)/income, net

 

 

(5

)

 

 

16

 

 

 

(17

)

 

 

(1

)

Interest income

 

 

61

 

 

 

240

 

 

 

139

 

 

 

284

 

Interest expense

 

 

(2,140

)

 

 

(3,192

)

 

 

(11,714

)

 

 

(8,090

)

Total other (expense)/income, net

 

 

(2,084

)

 

 

(2,936

)

 

 

(11,592

)

 

 

(7,807

)

Income before income taxes

 

 

48,064

 

 

 

12,675

 

 

 

90,155

 

 

 

44,251

 

Income tax expense

 

 

16,630

 

 

 

4,554

 

 

 

31,844

 

 

 

16,526

 

Net income

 

 

31,434

 

 

 

8,121

 

 

 

58,311

 

 

 

27,725

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on interest rate swap

 

 

(740

)

 

 

 

 

 

(1,224

)

 

 

Other comprehensive loss, before income taxes

 

 

(740

)

 

 

 

 

 

(1,224

)

 

 

Income tax benefit on other comprehensive loss

 

 

274

 

 

 

 

 

 

451

 

 

 

Other comprehensive loss, net of tax

 

 

(466

)

 

 

 

 

 

(773

)

 

 

Comprehensive income

 

$

30,968

 

 

$

8,121

 

 

$

57,538

 

 

$

27,725

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.57

 

 

$

0.15

 

 

$

1.07

 

 

$

0.51

 

Diluted

 

$

0.56

 

 

$

0.15

 

 

$

1.05

 

 

$

0.50

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

54,857

 

 

 

53,724

 

 

 

54,508

 

 

 

54,033

 

Diluted

 

 

55,981

 

 

 

54,859

 

 

 

55,784

 

 

 

55,258

 

 

 

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

 

5


 

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

 

 

(Loss)/Income

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance at April 30, 2015

 

 

69,625

 

 

$

70

 

 

$

219,198

 

 

$

147,352

 

 

$

73

 

 

 

15,563

 

 

$

(172,323

)

 

$

194,370

 

Proceeds from exercise of employee stock

   options

 

706

 

 

 

1

 

 

 

5,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,898

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,885

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,885

 

Excess tax benefit for stock-based

   compensation

 

 

 

 

 

 

 

 

3,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,123

 

Shares issued under employee stock purchase plan

 

92

 

 

 

 

 

 

770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

770

 

Change in unrealized loss on interest rate

   swap, net of tax effect

 

 

 

 

 

 

 

 

 

 

(773

)

 

 

 

 

 

 

(773

)

Issuance of common stock under restricted

   stock unit awards, net of shares surrendered

 

248

 

 

 

 

 

 

(2,073

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,073

)

Net income

 

 

 

 

 

 

 

 

 

 

58,311

 

 

 

 

 

 

 

 

 

 

 

 

58,311

 

Balance at January 31, 2016

 

 

70,671

 

 

$

71

 

 

$

231,800

 

 

$

205,663

 

 

$

(700

)

 

 

15,563

 

 

$

(172,323

)

 

$

264,511

 

 

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

 

 

 

6


 

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Nine Months Ended January 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

58,311

 

 

$

27,725

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

30,836

 

 

 

21,196

 

Loss/(gain) on sale/disposition of assets

 

 

138

 

 

 

(54

)

Provision for losses on accounts receivable

 

 

2

 

 

 

213

 

Deferred income taxes

 

 

244

 

 

 

1,363

 

Stock-based compensation expense

 

 

4,885

 

 

 

4,249

 

Changes in operating assets and liabilities (net effect of acquisitions):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(34,536

)

 

 

5,139

 

Inventories

 

 

1,244

 

 

 

5,430

 

Prepaid expenses and other current assets

 

 

325

 

 

 

(1,787

)

Income tax payable

 

 

(2,811

)

 

 

3,186

 

Accounts payable

 

 

2,931

 

 

 

(18,839

)

Accrued payroll

 

 

7,874

 

 

 

(10,078

)

Accrued taxes other than income

 

 

2,423

 

 

 

(496

)

Accrued profit sharing

 

 

1,710

 

 

 

(7,310

)

Accrued expenses

 

 

1,621

 

 

 

43

 

Accrued warranty

 

 

(248

)

 

 

(420

)

Other assets

 

 

(119

)

 

 

(84

)

Other non-current liabilities

 

 

(1,087

)

 

 

471

 

Net cash provided by operating activities

 

 

73,743

 

 

 

29,947

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

(23,805

)

Payments to acquire Battenfeld Technologies, Inc., net of cash acquired

 

 

 

 

 

(136,152

)

Refunds of deposits on machinery and equipment

 

 

4,222

 

 

 

1,398

 

Receipts from note receivable

 

 

56

 

 

 

60

 

Payments to acquire patents and software

 

 

(248

)

 

 

(171

)

Proceeds from sale of property and equipment

 

 

61

 

 

 

263

 

Payments to acquire property and equipment

 

 

(22,933

)

 

 

(24,240

)

Net cash used in investing activities

 

 

(18,842

)

 

 

(182,647

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from loans and notes payable

 

 

105,000

 

 

 

175,000

 

Cash paid for debt issuance costs

 

 

(1,024

)

 

 

(2,483

)

Payments on capital lease obligation

 

 

(447

)

 

 

(447

)

Payments on notes payable

 

 

(103,150

)

 

 

 

Payments to acquire treasury stock

 

 

 

 

 

(30,040

)

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

 

 

6,668

 

 

 

1,664

 

Payroll taxes paid as a result of restricted stock unit withholdings

 

 

(2,073

)

 

 

(1,124

)

Excess tax benefit of stock-based compensation

 

 

3,123

 

 

 

280

 

Net cash provided by financing activities

 

 

8,097

 

 

 

142,850

 

Net increase/(decrease) in cash and cash equivalents

 

 

62,998

 

 

 

(9,850

)

Cash and cash equivalents, beginning of period

 

 

42,222

 

 

 

68,860

 

Cash and cash equivalents, end of period

 

$

105,220

 

 

$

59,010

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

12,118

 

 

$

8,139

 

Income taxes

 

 

31,484

 

 

 

12,000

 

 

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

 

 

7


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2016 and 2015

 

(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 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, 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. As a result of an acquisition, we are now also a leading provider of shooting, reloading, gunsmithing, and gun cleaning supplies. We sell our products under the Smith & Wesson®, M&P®, Thompson/Center ArmsTM, Caldwell® Shooting Supplies, Wheeler® Engineering, Tipton® Gun Cleaning Supplies, Frankford Arsenal®, Lockdown® Vault Accessories, Hooyman SawsTM, BOG-POD®, and Golden Rod® Moisture Control brands.

We manufacture our firearm products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut, and we develop and market our accessories products at our facility in Columbia, Missouri. We plan to continue to capitalize on the goodwill developed through our historic 163 year old “Smith & Wesson” brand as well as our other well-known brands by expanding consumer awareness of the products we produce.

On May 5, 2014, we acquired substantially all of the net assets of Tri-Town Precision Plastics, Inc., or TTPP, which we refer to as the DRP Acquisition. On December 11, 2014, we acquired all of the issued and outstanding stock of Battenfeld Acquisition Company Inc., including its wholly owned subsidiary, Battenfeld Technologies, Inc., or BTI, which we refer to as the BTI Acquisition. See Note 3 – Acquisitions below for more information regarding these transactions. These acquisitions have been accounted for in accordance with ASC 805-20, Business Combinations, and, accordingly, the results of operations from the acquired businesses have been included in our consolidated financial statements following the acquisition dates.

 

(2) Basis of Presentation:

Interim Financial Information – The consolidated balance sheet as of January 31, 2016, the consolidated statements of income and comprehensive income for the three and nine months ended January 31, 2016 and 2015, the consolidated statement of changes in stockholders’ equity for the nine months ended January 31, 2016, and the consolidated statements of cash flows for the nine months ended January 31, 2016 and 2015 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 January 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, 2015 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 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, 2015. The results of operations for the nine months ended January 31, 2016 may not be indicative of the results that may be expected for the year ending April 30, 2016, 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. We are currently evaluating the impact that ASU 2014-09 will have on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Topic 835-30), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. The disclosure requirements are effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2015 and require retrospective application. We elected to early adopt ASU 2015-03 in the first quarter of fiscal

8


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2016 and 2015

 

2016. Accordingly, unamortized debt issuance costs of $4.1 million as of April 30, 2015, which were previously included in other assets, are included in notes payable in the accompanying consolidated balance sheet.

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, if any, that ASU 2015-11 will have on our consolidated financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the current requirement to recognize measurement-period adjustments to provisional amounts retrospectively. Instead, ASU 2015-16 requires the acquirer to recognize measurement-period adjustments, as well as the impact on earnings of changes in depreciation, amortization, and similar items, if any, resulting from the change to the provisional amounts, in the period when the amount of each measurement-period adjustment is determined. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We elected to early adopt ASU 2015-16 in the second quarter of fiscal 2016. As a result of the early adoption, goodwill was not restated for measurement period adjustments during the nine months ended January 31, 2015.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which amends the existing guidance to require that deferred income tax liabilities and assets be classified as noncurrent in a classified balance sheet and eliminates the prior guidance, which required an entity to separate deferred tax liabilities and assets into a current amount and a noncurrent amount in a classified balance sheet. The amendments to this ASU are effective for financial statements for annual periods and interim periods within those annual periods beginning after December 15, 2016, and early adoption is permitted. In addition, the new guidance can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We are currently evaluating the impact, that ASU 2015-17 will have on our 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 financial statements for annual periods and interim periods within those annual periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements.

(3) Acquisitions:

 

DRP Acquisition

On May 5, 2014, we acquired substantially all of the net assets of TTPP for $22.8 million, plus a $1.0 million working capital adjustment, for a total purchase price of $23.8 million, utilizing cash on hand. The DRP Acquisition of TTPP’s custom polymer injection molding capabilities was designed to vertically integrate a key component of our manufacturing operations and provide us with increased flexibility within our supply chain.

              

BTI Acquisition

On December 11, 2014, we acquired all of the issued and outstanding stock of BTI for $130.5 million, plus a $3.1 million working capital adjustment, for a total purchase price of $133.6 million, pursuant to a Stock Purchase and Sale Agreement. The BTI Acquisition was financed using a combination of existing cash balances and cash from a $100.0 million draw on our line of credit.

Based in Columbia, Missouri, BTI is a leading provider of hunting and shooting accessories, which develops, produces, and delivers innovative, high-quality products under several brands.

On January 9, 2015, we acquired substantially all of the net assets of Hooyman LLC, a manufacturer of extendable tree saws designed for the hunting and outdoor industry, for $1.9 million utilizing cash on hand, which we refer to as the Hooyman Acquisition. We have relocated its operations to our Columbia, Missouri facility.

9


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2016 and 2015

 

The aggregate purchase price of these acquisitions, including the working capital adjustments, was $135.5 million.

We have completed the valuation of the assets acquired and liabilities assumed. During the nine months ended January 31, 2016, goodwill was increased by $738,000 primarily as a result of reductions in estimates in the fair values of acquired intangible assets and inventory reserves.

The following table summarizes the estimated allocation of the purchase price for BTI at the acquisition date, which includes the net assets from the Hooyman Acquisition, as well as measurement period adjustments to date (in thousands):

 

 

December 11, 2014

 

 

Measurement

 

 

 

 

 

(As Initially

 

 

Period

 

 

December 11, 2014

 

 

Reported)

 

 

Adjustments

 

 

(As Adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

 

24

 

 

$

 

 

$

 

24

 

Accounts receivable

 

 

7,873

 

 

 

 

3

 

 

 

 

7,876

 

Inventories

 

 

12,819

 

 

 

 

(2

)

 

 

 

12,817

 

Income tax receivable

 

 

393

 

 

 

 

(279

)

 

 

 

114

 

Other current assets

 

 

563

 

 

 

 

 

 

 

563

 

Property, plant, and equipment

 

 

2,826

 

 

 

 

(318

)

 

 

 

2,508

 

Intangibles

 

 

73,550

 

 

 

 

(1,000

)

 

 

 

72,550

 

Goodwill

 

 

62,142

 

 

 

 

252

 

 

 

 

62,394

 

Total assets acquired

 

 

160,190

 

 

 

 

(1,344

)

 

 

 

158,846

 

Accounts payable

 

 

1,647

 

 

 

 

2

 

 

 

 

1,649

 

Accrued expenses

 

 

326

 

 

 

 

83

 

 

 

 

409

 

Accrued payroll

 

 

904

 

 

 

 

 

 

 

904

 

Accrued taxes other than income

 

 

9

 

 

 

 

 

 

 

9

 

Deferred income taxes

 

 

21,128

 

 

 

 

(714

)

 

 

 

20,414

 

Total liabilities assumed

 

 

24,014

 

 

 

 

(629

)

 

 

 

23,385

 

 

$

 

136,176

 

 

$

 

(715

)

 

$

 

135,461

 

We recorded $1.7 million of acquisition-related costs during fiscal 2015 related to the BTI Acquisition. There were no acquisition-related costs relating to the BTI Acquisition for the nine months ended January 31, 2016.

The goodwill that was recorded relating to the BTI Acquisition resulted from our ability to expand our presence in the firearm accessories market and leverage BTI’s broad portfolio of hunting and shooting accessories brands. Previously acquired goodwill of $12.0 million will be deductible for tax purposes over its remaining useful life. The remaining goodwill recorded as a result of the BTI Acquisition is not expected to be deductible for tax purposes. All of the goodwill recorded as a result of the BTI Acquisition has been allocated to our accessories segment.

We amortize intangible assets in proportion to expected yearly revenue generated from the intangibles that were acquired. 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

 

 

 

 

 

 

Life

 

 

Amount

 

 

 

(In years)

 

Developed technology

$

 

16,430

 

 

 

 

4.3

 

Customer relationships

 

 

25,280

 

 

 

 

4.4

 

Trade names

 

 

30,740

 

 

 

 

5.4

 

Order backlog

 

 

100

 

 

 

 

0.3

 

 

$

 

72,550

 

 

 

 

 

 

 

 

10


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2016 and 2015

 

The following table reflects the unaudited pro forma results of operations assuming that the BTI Acquisition had occurred on May 1, 2014 (in thousands, except per share data):

 

 

For the Three

 

For the Nine

 

 

Months Ended

 

Months Ended

 

 

January 31, 2015

 

January 31, 2015

 

Net sales

$

 

136,573

 

$

 

401,884

 

Net income

 

 

8,620

 

 

 

26,064

 

Net income per share - diluted

 

 

0.16

 

 

 

0.47

 

The unaudited pro forma net income for the three and nine months ended January 31, 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 acquisition had occurred on May 1, 2014. 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 BTI Acquisition occurred as of May 1, 2014 or the results that may be achieved in future periods.

PowerTech Acquisition

On February 26, 2016, we acquired substantially all of the net assets of PowerTech, Inc., for $1.2 million, utilizing cash on hand, and $275,000 will be payable in the future if a certain earnout is achieved. PowerTech, Inc., is a leading manufacturer of tactical flashlights, universal LED lights, and personal pocket lights designed for military, law enforcement, and sporting enthusiasts. We plan to transition and relocate its operations to our Columbia, Missouri facility.

 

(4) Goodwill:

The changes in the carrying amount of goodwill for the nine month period ended January 31, 2016 by reporting segment are as follows:

 

 

 

 

Firearms

 

 

 

Accessories

 

 

 

Total

 

 

 

 

 

Division

 

 

 

Division

 

 

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of April 30, 2015

 

$

 

13,770

 

 

$

 

61,656

 

 

$

 

75,426

 

 

Measurement period adjustments

 

 

 

 

 

 

738

 

 

 

 

738

 

 

Balance as of January 31, 2016

 

$

 

13,770

 

 

$

 

62,394

 

 

$

 

76,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

(5) Notes Payable:

Credit Facilities – On June 15, 2015, we entered into a new unsecured credit facility, or the Credit Agreement, with TD Bank, N.A. and other lenders, or the Lenders, which included a $175.0 million revolving line of credit, or the Revolving Line, and a $105.0 million term loan, or the Term Loan, of which $101.9 million remains outstanding as of January 31, 2016. The Revolving Line provides for availability until June 15, 2020 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 January 31, 2016, there were no borrowings outstanding on the Revolving Line. Had there been borrowings, they would have borne an interest rate of 3.75% per annum if we had selected the prime rate option and a range of 1.93% to 2.12% per annum if we had selected the LIBOR rate option. The Term Loan, which bears variable interest at rates calculated in the same manner as the Revolving Line, or 1.925% based on the one-month LIBOR rate at January 31, 2016, was entered into for the purpose of redeeming the entire $100.0 million outstanding principal balance of our 5.875% Senior Notes due 2017, or the 5.875% Senior Notes. The Term Loan 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 will be due in full. Concurrent with closing the Term Loan, we redeemed our 5.875% Senior Notes for a $2.9 million call premium, which is included in interest expense, plus accrued and unpaid interest. In connection with the redemption, we expensed $1.7 million of unamortized debt-issuance costs related to our 5.875% Senior Notes, which is included in interest expense in the accompanying consolidated statements of income and comprehensive income. We incurred $1.0 million of debt issuance costs related to our new credit facility, which are included in notes payable in the accompanying consolidated balance sheet.

11


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2016 and 2015

 

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% at July 31, 2015). 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 January 31, 2016, our interest rate on the Term Loan is 3.06%.

We recognize derivatives as either assets or liabilities on our consolidated balance sheets at fair value. The accounting for changes in the fair value (i.e., unrealized gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. Derivatives that do not qualify for hedge accounting must be adjusted to fair value through earnings. Our interest rate swap agreement is considered effective and qualifies as a cash flow hedge. The effective portion of the gain or loss on the derivative that is designated and qualifies as a cash flow hedge is recorded as a component of accumulated other comprehensive income or loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of January 31, 2016, the interest rate swap was considered effective and had no effect on earnings. The fair value of the interest rate swap on January 31, 2016 was a liability of $1.2 million and was included in other long-term liabilities on our consolidated balance sheet. We do not expect the interest rate swap to have any material effect on earnings within the next 12 months. As of January 31, 2016, the effective interest rate of our Term Loan was 3.06%.

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.

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 a 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 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 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% 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

12


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2016 and 2015

 

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 January 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 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 $105.2 million and $42.2 million as of January 31, 2016 and April 30, 2015, 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

·

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 fair value of our Term Loan is equal to the carrying value of January 31, 2016. The fair value of our 5.000% Senior Notes as of January 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 of $1.2 million as of January 31, 2016 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, are classified within Level 2 of the valuation hierarchy.

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.

 

13


SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended January 31, 2016 and 2015

 

(7) Inventories:

The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or market, as of January 31, 2016 and April 30, 2015 (in thousands):

 

 

January 31, 2016

 

 

April 30, 2015

 

Finished goods

$

27,562

 

 

$

28,240

 

Finished parts

 

30,567

 

 

 

34,269

 

Work in process

 

8,047

 

 

 

7,492

 

Raw material

 

9,366

 

 

 

6,894

 

Total inventories

$

75,542

 

 

$

76,895

 

 

(8) Intangible Assets:

 

The following table presents a summary of intangible assets as of January 31, 2016 and April 30, 2015 (in thousands):

 

 

 

January 31, 2016

 

 

April 30, 2015

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer relationships

 

$

 

27,860

 

 

$

 

(5,198

)

 

$

 

22,662

 

 

$

 

28,260

 

 

$

 

(1,633

)

 

$

 

26,627

 

Developed technology

 

 

 

16,430

 

 

 

 

(2,369

)

 

 

 

14,061

 

 

 

 

16,630

 

 

 

 

(1,014

)

 

 

 

15,616

 

Patents, trademarks, and trade names

 

 

 

36,095

 

 

 

 

(8,171

)